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Marc Palazzolo is manager of strategic operations at consulting firm Kearney. He has led last-mile delivery strategy for Amazon Prime Now, Fresh, and Whole Foods NYC and has helped many companies revamp their supply chain operations. Palazzolo has more than five years of industry experience in the areas of last-mile delivery strategy, e-commerce fulfillment, supply chain strategy and transformation, distribution excellence, distribution-center four-walls improvement, and logistics sourcing. He is the co-author of CSCMP State of Logistics Report, Parcel / Last Mile.
David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 00:02
The Covid-19 pandemic showed us just how vulnerable supply chains are. Today we face many threats: shipping delays; a lack of workers; failing infrastructure; transportation rates that are out of control; cybersecurity threats; and of course, a worldwide pandemic that is still very much with us. But with each of these threats comes opportunities. Welcome to this limited podcast series from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats.
This podcast is sponsored by AFS Logistics, offering trusted logistics services for parcel, LTL, freight audit and payment, and transportation management. AFS combines a data-driven approach with time-tested skills to help you navigate, find, and optimize the freight capacity you need when you need it. For more information, visit AFS.net.
Today, we focus on the threat of a freight capacity crunch. Here's your moderator for this segment, Supply Chain Quarterly's managing editor, Diane Rand.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 01:14
Joining us today is Marc Palazzolo. He currently serves as a manager of strategic operations at consulting firm Kearney, and before joining Kearney he worked at Amazon for several years. Thank you for being here today, Marc, to discuss the freight capacity crunch affecting supply chains. Can you summarize some of the main freight capacity issues that we're currently facing?
Marc Palazzolo, Manager, Strategic Operations, Kearney 01:36
Yeah, thank you, Diane and pleasure to be here. So, in terms of freight capacity issues that we're currently facing, there's multiple factors driving, really the crisis that we're all facing and have been facing for about the past 18 months. Based on conversations that I'm having with clients, there's really two key aspects, which I think are most critical. Number one is the rapid acceleration to e-commerce. So, with the pandemic driving more consumers online, this has accelerated e-commerce about five years within a, you know, less than two-year period. This shift is really resulted in a few supply chain challenges that both shippers and carriers weren't in a position to address quickly. For example, with the shift to e-commerce, that results in smaller shipment volume with more replenishment cycles, also results in increased delivery speed expectations, and overall greater shipment volume across all modes. With that drastic rise in e-commerce we've seen, and continue to forecast, that's really a driver of this capacity challenge in the market. Number two is the driver shortage. So, as shipment volumes rise, this has only exacerbated the existing driver shortage. With a generally aging workforce, among other factors, the U.S. driver shortage is expected to be upwards of 100,000 over the next two years, which is further going to impact the capacity issues shippers are facing, unless strategic interventions are made. Those are really the two key aspects or factors that I'm hearing from clients.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 03:11
And so what are some of the repercussions of those issues if we don't, as a[n] industry, tackle them and get some relief here soon?
Marc Palazzolo, Manager, Strategic Operations, Kearney 03:22
The repercussions if not holistically and strategically addressed, are significant. For my clients, the top-of-mind repercussions are really threefold. Number one is service. The key question executives are asking themselves is, How do I meet current customer expectations as well as deliver on increased demands brought on by this explosion e-commerce? Number two is cost. As we all know, operating costs across all modes have skyrocketed. For example, freight dry-van rates have increased 31% year over year, during an already inflationary period. Parcel and ocean are being impacted on [an] even greater scale. So, executives are asking themselves, How can I combat these significant cost headwinds and not have my EBITDA impacted? And the third, which I think is really important, is shippers are concerned about lost sales due to not having inventory in the right place at the right time, due to this tightened freight capacity. And so with with growth being ever important in today's marketplace, this is really top of mind for clients and executives.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 04:27
The big question on everyone's mind these days is, when can we expect these freight capacity problems to ease?
Marc Palazzolo, Manager, Strategic Operations, Kearney 04:33
Yeah, in terms of timeline for relief, I believe we're looking at end of 2022, if not into Q1 or Q2 of 2023 for the market to normalize. Unfortunately, many shippers have typically taken a more short-term approach to supply chain resiliency, and therefore organizations are currently unable to adapt and course-correct as fast as they desire. That said, there there are a variety of strategies which supply chain executives and organizations can pursue to combat these current challenges, but I think that journey is going to take us, you know, into next year if not into middle of 2023.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 05:12
It sounds about right. High capacity in one mode puts more pressure on capacity in another mode, or other modes. Do you see any potential domino effects on the horizon that shippers should be watching?
Marc Palazzolo, Manager, Strategic Operations, Kearney 05:26
There isn't one particular domino effect that I foresee or think that shippers should really be watching for, as the, you know, the problem space is highly interconnected. Rather, I'm of the perspective that shippers should be taking a holistic approach to enhancing resiliency and flexibility of their supply chain to jointly optimize for capacity costs and service. As you said, as you start to lean on one mode versus another, you start to shift that constraint, and so taking a step back and approaching holistically is a strategy to ultimately enhance your resiliency and not move forward with that domino effect.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 06:04
So beyond taking a holistic approach, is there anything else shippers can do to alleviate some of this strain, or do you think they just have to write it out to a certain extent?
Marc Palazzolo, Manager, Strategic Operations, Kearney 06:16
There are certainly short term levers that shippers can pull to alleviate the current pain that they're feeling. That said, I think a longer-term strategy across three prongs is really what is needed here, and a more surgical approach is needed here to enhance supply chain resiliency and ultimately mitigate future supply chain disruption. Number one is adopting an end-to-end supply chain approach and addressing structural changes. So, one of the first structural changes is thinking about how to strategically diversify your carrier supply base across all modes to minimize disruption. For example, even if a key supplier or key carriers not meeting SLAs duty reduce capacity, or if they're going to increase costs due to disruption in their supply chain, you're able to across modes or even within lanes, shift to other carriers. That's one structural change that clients have been deploying to start mitigating some of the disruption and challenges. A second element here is evaluating the ability to localize components of your supply chain to limit those disruptions on a national or global scale. This localization play also enables a shift from OTR parcel volume to other last-mile carriers such as Shipt, DoorDash, Roadie, [Walmart, local?] etc.—some of those other gig economy players that have more flexibility due to their operating model. So, again, adopting this end-to-end approach and addressing these structural changes is one component that we think is key. The second component is doubling down on investments in advanced technologies, with a particular focus on exception management or [sensitive pivot] technologies, which have predictive analytics. This allows supply chain organizations to be able to proactively identify issues and take action prior to avoid a disruption. Now, there has to be a strategic evaluation of that capex and opex trade off, but that is one—that is an area that leaders are taking to make their supply chains more future proof. The last and third prong of the strategy that we're recommending for clients is optimizing your operating model. From my perspective, as I said previously, many companies are responding to turbulence in the logistics market in a very tactical and reactive way, but to be able to make their supply chain more resilient, having that long-term approach and thinking about their operating model more strategically, is really key. More specifically, these longer-term strategies will focus on enabling real-time shipment visibility, driving flexibility to pivot quickly as exceptions and those choke points arise, and implementing analytics that continually monitor your logistics network to anticipate potential disruptions and assess performance. Those are really the three key things that I think, from a longer-term perspective, shippers can deploy to be able to ride out this turbulence.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 09:30
Wonderful advice. Thank you so much for being with us today to talk to us about the freight capacity crunch that's affecting our supply chains, and it'll be interesting to see what the next year or so will bring, and how our industry will change and shift and grow, and some of the innovations that will come out of it. Just—it'll be interesting to see how that, how it all shakes out. So, thank you, Marc, for your time today. We really do appreciate you coming on and talking to us.
Marc Palazzolo, Manager, Strategic Operations, Kearney 09:59
Absolutely, Diane, it was a pleasure and really enjoyed the conversation. Thank you.
Diane Rand, Managing Editor, CSCMP’s Supply Chain Quarterly 10:05
David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 10:07
Thank you for joining us for this podcast from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats. We encourage you to subscribe wherever you get your podcasts.