Inside the trends affecting logistics management

On the West Coast, the Port of Los Angeles is looking to attract more shippers as volumes fall from their record-breaking heights. Along the East Coast, the Port of New York and New Jersey’s leadership touts that it has been the nation’s busiest container port for two months running.

"We've been in the number one position here in the United States for 22 consecutive years. One or two months is not going to create a trend," Gene Seroka, the Port of Los Angeles' executive director, said in a November 2022 media briefing. Nonetheless, he said the port has been on a tour for months, knocking on shippers' doors to get some cargo allocation back.

While it’s not the only factor responsible for their diverging cargo trends, experts and port leaders agree the shadow of negotiations between the International Longshore & Warehouse Union and Pacific Maritime Association has motivated shippers to divert more U.S.-bound cargo from the west to the east. Companies deployed a similar tactic for rail cargo in Q3 to shield against a potential freight rail shutdown, which still remains a concern.

"Even though both sides — the PMA and the ILWU — have put out two jointly signed media releases, stating they will not strike nor lockout, there's still skepticism," Seroka said.

The threat of a strike has been enough to spur action from shippers, altering the nation's flow of cargo along the way. But in the process, shippers have found diverting freight — like other supply chain contingency plans — can create tradeoffs like longer lead times and added logistics complexity.

East Coast ports snag import share from the West

Diversion activity became more pronounced over the last couple of months after the ILWU and PMA failed to reach a labor agreement by last year’s July 1 deadline, said Glenn Koepke, GM of Network Collaboration at FourKites.

In October 2022, 62% of FourKites customers’ import shipments arriving to U.S. ports went to the East Coast, versus 38% to the West Coast, according to company tracking data. That’s the largest proportion for the East Coast so far this year and exceeds its 57% share in October 2021.

The volatile ocean shipping conditions sparked by the COVID-19 pandemic — including sharp swings in rates and congestion levels — have led companies to renegotiate their contracted rates and capacities more frequently, according to Koepke. This has allowed shippers to be more nimble about where their cargo arrives.

“If you were to compare diverting cargo now versus four years ago, in essence, the process of which you procure ocean freight enables a little bit more efficient diversion today, because historically, it’s been annual contracts,” Koepke said. “Now you see quarterly type contracts.”

At the Port of Savannah, it’s unclear how much of its recent import growth is directly tied to diverted cargo, according to Cliff Pyron, chief commercial officer at the Georgia Ports Authority. But in the quarter ending in September, 166 importers were either completely new customers or grew their Savannah trade by 20% or more.

“Since FY2001, the Port of Savannah has gained cargo, both over the short- and long-term, with each labor action on the West Coast,” Pyron said in emailed responses to Supply Chain Dive. “We are already hearing from port customers who are shifting cargo to the East Coast as a hedge against a potential strike.”

Cargo diversion introduces new tradeoffs

Although the tactic of diverting cargo can mitigate labor-related disruptions, it introduces other potential supply chain drawbacks.

Rerouting cargo from Asia through the Panama Canal to avoid risks on the West Coast lengthens lead times. While retailers with bloated inventories may be less concerned with added days in transit, it can be a bigger issue for other sectors. Compounding this are inflationary pressures that companies of all types are looking to mitigate.

Cargo diversions may be a temporary measure as a result, said Sourcing Industry Group President and CEO Dawn Tiura: “You’re going to go back to the lowest total cost alternative.”

Quick jumps in import activity can also strain port operations, sparking congestion concerns for cargo that has already seen added lead times due to diversions.

As other retailers scrambled to divert their cargo from the West Coast, The Children’s Place’s inbound supply chain encountered East Coast port congestion, which contributed to an increase in the company's inventory levels.

Still, as the risk of strikes at ports or railroads incentivizes companies to strengthen their contingency plans, FourKites's Koepke expects cargo diversions will become a more regular part of a shipper’s playbook going forward.

“What we hear quite a bit is shippers are using this in their planning models, so as they look to future operations based on different global events or socioeconomic events, they will look to route cargo to certain places,” Koepke said.

A labor union representing 350,000 UPS workers could strike this summer if a new contract agreement isn't reached on time, threatening the delivery of millions of parcels.

Teamsters leadership has made it clear they are taking a hard-line stance on pay, scheduling and other issues ahead of negotiations for a new labor contract with UPS. The current contract is set to expire July 31.

“Our union is resolved to win the best contract for UPS members and to reset the standards for wages and benefits in this industry by August 1, 2023," Teamsters General President Sean O’Brien said in a statement last year. "We won’t extend negotiations by a single day."

UPS, meanwhile, has stressed the need to reach an agreement, saying it aims to negotiate a contract that benefits all sides. The carrier has been touting its employee benefits and long-standing relationship with the Teamsters.

"Our focus is on reaching an agreement that provides a win-win-win, for our employees and the union, for UPS, and for our customers," the company said in a statement.

Here's what shippers need to know about the state of contract talks, the likelihood of a strike and how to prepare for any supply chain fallout.

Where do negotiations stand?

National contract negotiations don't kick off until April, Teamsters spokesperson Kara Deniz said, but the Teamsters' UPS National Screening Committee has been reviewing various proposals for what should be included in the Master Agreement.

Committee members sorted and compiled more than 11,000 proposals submitted by locals from across the country during a Jan. 9 meeting in Washington, D.C., according to a Teamsters news release. Five screening subcommittees also met to review proposals on areas such as safety and health.

"The screening of proposals will determine what will ultimately be put forth to the company when National Master Agreement negotiations begin," the release said.

What are the top issues UPS and the Teamsters need to address?

The Teamsters union is largely looking to address scheduling issues that have cropped up since the COVID-19 pandemic fueled a surge in package volumes, Deniz said in an interview. Some drivers say that they continue to be forced into working a sixth day or taking "excessive overtime."

A driver works about 9 hours a day on average, but schedules can vary according to customer needs, according to the UPS statement. Still, the carrier recognized the need to find the right balance between serving customers and meeting drivers' desired work hours.

"Last year, UPS met individually with drivers to better understand their unique preferences, and we are making adjustments where possible," the company said.

Deniz said the Teamsters are also looking to eliminate discrepancies in pay and other areas between full-time drivers and 22.4 combination drivers. The latter category, with the number referring to an article in the current contract, covers employees typically making deliveries on a Tuesday-through-Saturday schedule.

"It's the same job for less pay and a slightly different schedule in terms of days on the job," Deniz said of the combination driver positions.

In addition to eliminating pay gaps, the union is also looking to negotiate a member pay increase for both full and part-time employees, but declined to provide a specific amount. Full-time package delivery drivers at UPS have a $95,000 annual average wage, while the average part-time employee earns $20 an hour, according to the company.

How likely is a strike?

Both sides aim to reach an agreement by the July 31 contract expiration. If that effort is unsuccessful, the Teamsters say they are ready to strike.

"We’ll either have a signed agreement that day or be hitting the pavement," O’Brien said last year.

A UPS strike wouldn't be unprecedented ground for the union. In 1997, 185,000 UPS Teamsters halted deliveries for more than two weeks before a new contract agreement was reached.

Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS, said in an interview that he believes the two sides will ultimately come to an agreement, though it won't be easy.

“But I also think the risk of a strike is the highest it's been since 1997, and it's a completely different environment,” Amling added.

This round of bargaining is also likely to be far different from 2018, when the Teamsters ratified a contract despite the majority of participating members voting against it. O'Brien, who will be the face of union negotiations this spring, had won his election for Teamsters general president in 2021 as a vocal critic of how the previous contract agreement went down.

"[The Teamsters] should've went back to the table or struck the employer," O'Brien said of the agreement in a candidate debate prior to his victory. "Unfortunately, that didn't happen and our members got stuck with a contract that they voted down.”

How disruptive would a strike be for shippers?

Out of UPS' roughly 534,000 employees worldwide, 350,000 are represented by the Teamsters, per a recent company report. A strike would create large-scale disruptions in the company's network.

It would also likely create headaches for FedEx and other last mile carriers as shippers attempt to divert their deliveries to alternatives.

"Even though I think UPS will try to maintain limited service in the event of a strike, the capacity being taken out of the market will drive up pricing with other carriers," Amling said.

UPS' U.S. ground delivery network handled more than 17 million packages daily on average in 2021. With that level of activity, the company held a strong position in the parcel delivery sector overall at 24% of market share by volume in 2021, according to the Pitney Bowes Parcel Shipping Index.

Despite concerns over the negotiations, in a July 2022 earnings call, CEO Carol Tomé said the company continues to win business with customers who are aware of the upcoming negotiations.

"We are building contingency plans, and we will take care of our customers," Tomé said.

What can shippers do to protect their supply chains?

Amling recommended for business-to-business shippers to have buffer stock on hand in the event of UPS disruptions, while business-to-consumer shippers should be ready to call on alternative carriers.

However, existing contract arrangements can make it difficult for many shippers to divert a large share of their volumes to other delivery providers, said Transportation Insight Chief Strategy Officer John Haber. Volume-based discounts incentivize businesses to rely on one carrier for much of their shipping activity, and minimum volume commitments penalize shippers that don't meet certain thresholds.

"For a lot of shippers, their hands are kind of tied if they move volume, which is dangerous if UPS goes on strike," Haber said.

Ultimately, Haber advised shippers to begin contingency planning as soon as possible, since capacity at other carriers will run out fast.

"If you wait until June, it will be too late," he said.

Recent layoffs at big-name logistics companies could be the start of a wider culling of supply chain jobs amid economic uncertainty, according to experts, leaving plenty of talent available for firms still hiring.

Freight forwarder Flexport laid off 20% of its workforce earlier this year, citing a macroeconomic downturn that is hurting its customers. Other seasoned industry names including C.H. Robinson and DSV are also relying on layoffs or hiring freezes as a way to reduce their labor costs.

"Lower volumes, combined with improved efficiencies as a result of new organizational and operational structures, means we are overstaffed in a variety of roles across the company," co-CEOs Dave Clark and Ryan Petersen told employees in a Jan. 11 memo.

Many companies in the sector had aggressively expanded their employee ranks to keep up with heightened demand sparked by the COVID-19 pandemic. Oftentimes, they competed in pricey bidding wars for talent across the supply chain.

But with consumer spending now cooling in a cloudy economic environment, accelerated growth has turned into bloated operating expenditures over the past several months. As vulnerable companies respond by slashing payrolls, they leave an opening for other businesses to swoop in and add seasoned talent to their ranks.

Technology companies could see the most pressure

Companies offering technology-driven logistics services and platforms are at the highest risk to enact future layoffs, said Spencer Shute, principal consultant at Proxima. Shippers aren't often looking to implement pricey new technology during an economic downturn, limiting the growth of the likes of Flexport, he added.

Many logistics firms have the option to pare down their network's transportation and warehousing assets, such as FedEx cutting back its flight frequencies. But companies with few — if any — physical assets to begin with don't have that as an option.

"They don't have the assets or the fleets or maintenance programs, things like that, that they can try to reduce costs on," Shute said. "It ultimately comes down to labor, which is their biggest expense."

Recruiting and sales employees are often targets of labor cost-cutting measures, and engineering roles could be at risk at some logistics companies, Shute said. On the other hand, more manual positions such as drivers and warehouse staff continue to be a high hiring priority for many employers.

But even frontline jobs haven't been immune to wider economic pressures. Seasonally adjusted warehousing and storage employment fell about 3.7% from June to December 2022, according to the U.S. Bureau of Labor Statistics.

Reducing labor costs in response to weakening demand isn't a new scenario for the logistics sector. However, the current environment has some unique qualities compared to past downturns that could give companies added pause before enacting their own cost-cutting measures, said Brad Hulbert, a director in Grant Thornton's sourcing and supply chain practice.

Employers are attempting to rightsize their labor force while at the same time trying to minimize losses from recent hires, who have often required elevated recruiting and training expenses in a competitive hiring environment. Hulbert added that many companies are also already doing more logistics work with fewer employees, often by relying on technology platforms to reduce the amount of people needed to track shipments.

"It gets harder and harder to squeeze that operating expenditure out of your annual levels, because you have already reduced headcount over the last five to 10 years with those efficiency gains in technology," he said.

Resilient competitors poised to benefit

With several logistics companies cutting jobs and pressing pause on hiring, an influx of talent is now looking for work.

Chris Shields, global CEO and founder of freight and logistics recruitment firm Freightalent, said there are plenty of candidates in the freight technology space available for hire, such as designers, developers and engineers. Resilient competitors with consistent growth have taken advantage of the situation, swooping in and bolstering their ranks with experienced employees.

Even the firms that have announced layoffs continue to hire in other areas. Around the same time as layoffs were announced, C.H. Robinson had jobs in operations, technology and other areas open. Flexport, meanwhile, said it was looking to double its software engineering talent as it waits for conditions to improve.

"The current slowdown in volume gives us time to focus on building our technology bench while the economy lags," Flexport's memo said. "Then, as the economy recovers, we will be ready to be the Flexport that we all want to be–the one stop for customers to make the movement of goods around the world easy."

However, Shields said employers with sudden, large-scale layoff announcements could be a deterrent to their recruiting efforts, even when customers' volumes rebound and hiring ramps up again.

"It's going to be a massive advantage for all these other companies who are going through steady and solid growth continually," Shields said. "They're going to be able to get good talent, just because these other companies kind of shot themselves in the foot a little bit in the way that they've managed things."

At an investor's conference last December, Norfolk Southern CEO Alan Shaw made a somewhat surprising announcement for the rail industry: The company would look beyond short-term profits to rebuild service and invest in customer relations.

Following nearly three years of declining service and contentious negotiations with labor that nearly boiled over into a nationwide strike, railroads have been working to remake their image in the public and private sphere. Shortly after Norfolk Southern's investor day, other major railroads including CSX and BNSF made similar promises to invest in infrastructure and workers.

Those announcements, however, were quickly overshadowed in early February when a Norfolk Southern train carrying hazardous materials derailed in East Palestine, Ohio. While no injuries or deaths have been associated with the incident so far, half of the town's roughly 5,000 residents were forced to evacuate so officials could release and burn toxic vinyl chemicals as a safety precaution.

Railroads are now engaged in another political firestorm with the prospect of more regulatory oversight. As a result of the derailment, Senate President Chuck Schumer called on the National Transportation Safety Board to expand its investigation into Norfolk Southern to include the safety practices of all Class I carriers.

"In the eyes of the public, the railroads went from bad service to being bad bosses, to now being dangerous within 12 months," said Anthony Hatch, owner of transportation consulting firm ABH Consulting. "Railroads will pay a price – all of them, not just Norfolk Southern."

Can rail still win back customers?

Reports of chickens at risk of starving from poor rail service and workers not receiving paid sick days have tainted the impression of railroads over the past year. The high-profile derailment added fuel to the fire just as many carriers were pushing to improve their public image.

Railroads have shaken up their C-Suites in recent months, and the four largest U.S. railroads have also struck agreements with local unions to add paid sick leave days. Norfolk Southern, BNSF and CSX also made pledges to invest in technology, customer service and infrastructure as they look to win back lost customers.

"If you can't service your customers well and reliably, all the cost control in the world won't deliver a healthy growing business," Joe Hinrichs, who became CEO of CSX in September, told investors during an earnings call late January.

Adriene Bailey, a partner of consultancy firm Oliver Wyman's Transportation practice, said that the derailment adds to the recent "snowball effect of negativity" around railroads. But she doesn't expect this to be a "pivot" point for the industry – for many shippers, rail remains the cheapest, safest and most fuel-efficient option.

Ultimately, the quality of service will determine whether rail can capture market share away from trucking going forward.

"Shippers want to do more with rail. But it is mind-numbingly difficult to do business with railroads at times," she said. "So there's a journey that railroads need to undertake to get themselves to a place where shippers are willing to invest in doing more business with them."

Although shippers aren't expected to radically change their relationship with railroads, Bailey still called the overwhelming public blowback against railroads "troublesome."

"In the long run, the railroads are our best transportation option – for safety reasons and for environmental reasons," she said. "And if we clobber the railroads out of a knee jerk reaction, we will be robbing ourselves and future generations the right to have a very energy efficient, low emissions way of moving freight around this continent."

What tightened oversight means for the industry

A bipartisan bill introduced and endorsed by President Joe Biden would increase fines around safety violations, require trains to be operated with two-man crews and compel railroads to add more track monitoring equipment.

More broadly, however, the derailment is likely to create more skepticism around railroads' technological investments, which carriers have said are critical to advance plans around efficiency and service improvements.

Railroads have remained at odds with labor unions and the Federal Railroad Administration over the use of advanced technology – namely automated track inspections and a cruise-control system known as Trip Optimizer. While carriers say these technologies can enhance safety and operational efficiencies, unions argue that the reliability of these systems are unproven and that they will become a means for railroads to cut workers and maximize profits.

Workers are open to new technology when it enhances safety and assists railroaders in their day-to-day work, said Greg Regan, president of the Transportation Trades Department, which represents a coalition of unions within the transportation industry. But railroads have tried to justify automation as a reason to eliminate in-person inspections or cut an additional crew member from the locomotive.

"I think the number one focus should be using this technology to empower our workers to do their job better," Regan said. "Instead of jumping to use this technology to replace the workers."

The FRA has already limited the expansion of these technologies despite reports from railroads of safety improvements. A federal judge sided with BNSF that the agency's denial of an automated track inspection pilot expansion was "arbitrary and capricious," saying the decision was "especially glaring in the face of the agency's statutory mandate to prioritize safety."

The FRA could take even more of a hardline stance in light of the derailment, said Hatch of ABH consulting, saying the derailment gives the agency "more wind at its back" to oppose technological expansion.

"It doesn't eliminate, but it certainly delays the future of technological advancement," Hatch said. "It prevents railroads from becoming more efficient, more consistent or more resilient. That's not the direction shippers want their carriers to go."

Even as they grapple with declining volumes, UPS and FedEx have both moved to increase delivery rates by 6.9% on average. But the full force of their changes could cost shippers even more.

How much more depends on factors like the services they use, packages they ship and the destinations of their deliveries. Customers also need to consider larger increases for longer-distance shipments, additional handling fees and higher minimum package charges to reduce the sting of the hikes on their businesses.

"You can see how that will add up to be a very, very substantial increase for many, many shippers," said Melissa Priest, founder and CEO of Alexandretta Transportation Consulting.

Rate increases support network enhancements while helping maintain high service levels, UPS said in an emailed statement. Executives for both companies have pointed to inflationary pressures as another reason for a larger rate increase than the year before.

But shippers are also grappling with a difficult macroeconomic environment, adding further incentive for them to push back against rate increases. With volumes declining from the dizzying highs of 2021, it’s possible that carriers will become more amenable to negotiated discounts.

Here's what parcel shipping experts say customers should keep in mind when evaluating how the changes will impact their bottom lines.

Few differences between UPS, FedEx rate changes

UPS and FedEx have instituted nearly identical rate hikes across services and weight classes, according to an analysis by parcel and LTL spend consultancy Shipware.

The similarities between the two aren’t a coincidence, said Kevin Miller, VP of data insights at logistics software provider Sifted. If one of the carriers decided to implement lower rate hikes than its competitor, its network would be overwhelmed by a surge in demand that would hurt service levels.

"They will always be pretty similar, because right now, one of them can't absorb significantly more clients than the other one can," Miller said.

Surcharges add further cost pressures

The 6.9% average increase doesn't account for surcharges that can pile onto the final shipping cost. These include extra fees for residential deliveries, handling oversized packages and delivering to rural destinations — many that will become more costly when the new rates take effect.

Shippers should especially stay on top of fuel surcharges, as that applies to every package regardless of size or final destination, said Micheal McDonagh, president of parcel at AFS Logistics. The fuel surcharge percentages are subject to weekly adjustments by both carriers.

McDonagh’s colleague, AFS Logistics Chief Analytics Officer Mingshu Bates, provided one example to illustrate the extent of the surcharges: The cost to transport a surfboard from New York to Malibu, California, using FedEx's 2 day shipping service would be $153.77 this month, but will total $173.28 come January, according to an AFS calculation.

Longer-distance shipments to see greater increases

FedEx and UPS' rate hikes particularly punish shippers that need goods moved over longer distances.

Deliveries that fall under higher shipping zones will see greater increases. Rates for shipments spanning zone 5 and above increased 7.8%, while rates for shipments in zone 4 or less saw a 6.6% average increase, Miller said.

One way shippers can reduce their exposure to higher-zone deliveries is to fulfill orders from facilities closer to the end customer.

"Whether you use 3PL companies or fulfillment center companies, adding additional warehouses is more important because people are so interested in getting their products faster, on time and for cheaper," Miller said. "The only way to do that is to expand your network."

Shippers who are able to trim the distance on deliveries will benefit from the ongoing trend of carrier diversification. Increasing competition from regional delivery companies, which focus on shorter-distance shipments, led to less drastic price increases in the shorter zones, according to Priest.

"For UPS and FedEx, it would be wise for them not to dismiss that impact and that is what you see in the pricing here," Priest said.

Higher shipping costs to rural destinations

FedEx is instituting a new $13.25 per package surcharge for domestic package shipments going to designated rural ZIP codes in the contiguous U.S.

This follows UPS’ announcement of a similar surcharge last year. For UPS, its per-shipment remote area surcharge will increase to $13.05 in the contiguous U.S., effective Dec. 27. These charges can particularly sting shippers who often ship to rural locations, such as merchants selling hunting gear, Priest added.

More than 3 million people in the U.S. are in areas covered by FedEx's new remote surcharge, according to an analysis by independent parcel consultant Nicholas Fanelli, former global head of logistics at Gelato.

To mitigate these delivery area surcharges, Fanelli said in a LinkedIn post that online retailers should explore alternative carriers for delivery to the affected ZIP codes that don't have these surcharges. Shippers can also negotiate the published fees with the carriers or pass the surcharge cost onto affected orders.

Demand is cooling — will relief for shippers follow?

Experts note that shipping rates are negotiable, but how amenable the delivery giants will be to concessions is up for debate.

Since the COVID-19 pandemic caused a surge in home delivery volumes, demand hasn't been an issue for the carriers. Ground shipping rates have climbed to record highs as a result, according to the Cowen/AFS Ground Parcel Freight Index. Discounts are easier to come by when FedEx and UPS are pursuing volume growth more so than higher profits, Bates said.

But cooling demand reported by both carriers in their most recent quarters suggests that the pricing pendulum may be swinging back in shippers' favor.

UPS, for example, is open to passing on the savings generated from its in-house productivity initiatives to its customers, CEO Carol Tomé said on an earnings call. Although UPS has prioritized increasing per-package revenue to expand margins under Tomé, the company will balance that strategy with its productivity efforts to fuel growth going forward.

"In fact, as we continue to drive productivity inside of our business, we're willing to give some of that back to our customer through a revenue share, because why not?" Tomé said. "If we can increase delivery density…we'll give some of that back, because we should."

When President Joe Biden signed the Ocean Shipping Reform Act of 2022 into law last summer, he promised sweeping changes to the ocean shipping industry after more than two years of port congestion, delays and rising costs.

“I promised to crack down on ocean carriers whose price hikes have hurt American families and American businesses,” Biden said upon signing the law. “And today I'm proud to say that we got that done on a bipartisan basis.”

Many shippers celebrated the legislation as a significant step forward in addressing shipping disruptions that have arisen during the pandemic, including soaring fees and a lack of containers for agricultural exports. Biden added the law will address the inflation that has plagued businesses and “bring down prices on goods American families need."

But the true impact will largely depend on how it's enforced by the Federal Maritime Commission — an agency with limited funding and staff that shippers say has been historically slow to regulate the shipping industry.

While the law will grant the agency more enforcement power to crack down on potential malpractice, FMC Commissioner Carl Bentzel acknowledges there's only so much the agency can do to address congestion and rising prices.

"A lot of the problems are really problems of supply and demand, and those may be beyond the ability of any agency to handle," Bentzel said in an interview with Supply Chain Dive.

Congress responds to rising fees, congestion

Lawmakers were spurred to act last year after soaring shipping rates, higher fees and unpredictable schedules disrupted business operations and pushed many companies to raise prices. Companies have said they've had to pay significantly more to transport products while also experiencing major delays in service.

“We have received hundreds of complaints from shippers,” said Rep. John Garamendi, a Democrat from California who sponsored the initial House version of the bill.

The law gives the FMC greater authority over shipping companies and empowers the agency to self-initiate investigations into carriers' business practices. But one of the biggest impacts of the bill, shippers say, is that it pushes the FMC to act more aggressively on detention and demurrage, which carriers charge when cargo isn’t moved quickly enough from terminals.

The legislation shifts the burden of proof to show the reasonableness of these fees to ocean carriers instead of shippers. It also requires the FMC to issue rulemaking within 45 days “further defining prohibited practices by common carriers” in regards to demurrage fees.

Demurrage and detention charges increased 104% from 2020 to 2021 across the world’s 20 largest ports, a Container xChange report found. In March, shippers paid approximately $43.03M in demurrage fees through the Port of Los Angeles, according to an analysis from the Dray Alliance.

“Today, American manufacturers, farmers and consumers are at the mercy of declining ocean shipping performance and rising costs," said Tom Madrecki, vice president of supply chain and logistics for the Consumer Brands Association. "Unfair practices have contributed to these costs and lack of container availability, which impacts U.S. agriculture stakeholders including many of our member companies. “

Carriers have reduced the amount of free time that containers are allowed to sit at terminals before demurrage fees take effect, contributing to soaring costs, said Peter Friedmann of the Agriculture Transportation Coalition. Port congestion has also made it difficult for shippers to make appointments to get into terminals and remove containers.

"We've had instances where the container is still on the darn ship and hasn't even been offloaded onto the terminal, but for whatever reason, the carrier started the free time," Friedmann said.

The law requires carriers to provide invoices that lay out the allowed free time and other metrics that would make it easier for shippers to see when they've been unreasonably charged. Ocean carriers say detention and demurrage are necessary tools to encourage the flow of goods, arguing new regulations could exacerbate congestion and inject new complexities into the industry.

“Those tools may effectively be lost,” said John Butler of the World Shipping Council, which represents the world's largest containership operators. “And if that’s the case, then we end up with more congestion, not less congestion. And of course that’s worse for everybody, but especially for shippers.”

Impact will depend on enforcement

Whether the law will lead to substantial changes within the shipping industry depends on how it’s ultimately enforced by the FMC. Shippers have noted that the agency has been reluctant to enforce measures against carriers in the past, and even the agency acknowledges that its limited budget and workforce has hindered its ability to regulate the industry.

The FMC oversees every mode of transportation from the moment a shipment is loaded in a container to when it arrives at its final destination. But despite having oversight responsibility for an estimated $6 trillion in economic activity, it continues to work with limited resources, according to Bentzel.

The FMC had a $30.3 million budget in FY 2021 and the agency said in its budget request it has been unable to meet its desired staffing level of 128 permanent, full-time positions. Bentzel said the lack of resources has been “the real challenge” in regulating the shipping industry in a time of supply chain chaos.

“We have one investigator for every trillion dollars of commerce,” said Bentzel. “The SEC, for every trillion dollars of securities and financial instruments that they regulate, [has] about 150 investigators.”

The Ocean Shipping Reform Act earmarks millions of dollars in funding for the FMC to carry out rulemaking and investigations associated with the law. The legislation includes approximately $32.9 million for FY2022, an amount that will increase to $49.2 million in FY2025.

Beyond more funding, the law also ensures that the FMC more heavily regulates areas in which shippers say the agency’s been slow to act. In some cases, the law compels the FMC to issue rulemaking on subjects the agency has already provided guidance, but no rules.

For example, the Ocean Shipping Reform Act requires the FMC issue rulemaking within 45 days “further defining prohibited practices by common carriers” in regards to demurrage fees. The FMC already issued recommendations on what is considered reasonable demurrage charges in 2019, but stopped short of issuing a requirement.

Bentzel said the law is largely in line with steps the agency is already taking to address demurrage. The FMC began "doing audits of all ocean carriers" in regards to their demurrage and detention practices last July, a process that helped lead to a $2 million fine against Hapag Lloyd.

Shippers expect the new law will not fix many of the structural issues they see in the industry, such as high rates and a lack of competition. Still, they acknowledged any legislative change is welcome in an industry that hasn't seen major regulatory updates since the Ocean Shipping Reform Act of 1998.

“Is it going to be a silver bullet? No, it’s going to be completely contingent in the enactment of it,” said Aubrey Bettencourt, president and CEO of the Almond Alliance, which represents California's almond industry. “It has great merits to modernize the FMC. But then it’s up to us to get the FMC to actually flex and utilize that authority.”

If carriers are expecting record spot prices to return in 2023, analysts say don’t count on it.

Conditions fueled by the pandemic and shippers seeking any means necessary to meet customer orders have waned. The experts say soft economic conditions at least through the first half of the year won’t be great for carriers in an environment, which now is a shipper’s market.

Major carriers including Schneider, J.B. Hunt and HUB Group are telling investors they expect market conditions will improve by midyear. Others, like Old Dominion CFO Adam Satterfield, are holding their breath as they watch improving market trends.

"We are starting to trend back in the right direction [on volumes]," Old Dominion CFO Adam Satterfield said on a Feb. 1 earnings call. "Whether or not we get back to the full 10-year average at least in the first-half of the year remains to be seen."

A drop in rates was expected

Falling spot rates were evident throughout 2022, though the drop was greater than analysts projected.

Ken Adamo, DAT chief of analytics, told Supply Chain Dive his organization originally thought rates would fall between 15% and 20% in 2022, but the actual decline was closer to between 25% and 30% YoY.

The large decline led DAT to suggest in its annual outlook report that spot rates may already be at their floor, and are poised to turn the corner soon.

“Throughout 2021, capacity struggled to keep pace with truckload demand,” DAT said in the report. “Early 2022 showed signs of equilibrium, but the record number of new entrants — attracted by high rates during the pandemic peak — created an oversupplied market that pushed spot rates downward.”

Spot rates plummeted in 2022

Dry van, flatbed and reefer linehaul rates since 2018

Jonathan Phares, assistant professor of supply chain management at Iowa State University, said the trucking industry started 2023 with unfavorable indicators: There was extra trucking capacity to start the year, and retail inventory data suggests stores are stockpiled.

“With a looming recession and excess inventory, we could see spot markets rate drop dramatically in the first quarter (and continue) into the second quarter if the recession hits during that time,” Phares said.

Some executives expect the economy to recover before the end of Q2, though.

"We're hopeful, got our fingers crossed that we will come out of this thing as we get into the spring and later on in the second quarter," Old Dominion CEO and President Greg Gantt said on a recent earnings call.

Knight-Swift Transportation Holdings CFO Adam Miller cited a similar timing in the company's January earnings call.

“Last year, we expected the first half to be strong and then cool off in the second half, which is largely what happened,” Miller said. “In 2023, we expect the opposite: more challenging environments in the first half before we start to see a recovery to a more typical freight demand, leading up to an improving Q4 peak season.”

The outlook for rates

Though trucking executives are looking forward to a spot rate recovery, shippers may seek to take advantage of low prices to be more thoughtful about their strategy, Ronnie Davis, vice president, North American surface transportation for C.H. Robinson Worldwide, said in an email.

“During the pandemic, shippers, carriers and all of us in the logistics industry were focused on agility and getting creative to work through the latest disruption,” he said. “There’s no better time for a shipper to find efficiencies and take costs out of their supply chain.”

C.H Robinson is forecasting rates to be down 16% this year compared to last year. “The market is projected to bottom out in late April or early May, when rates reach the average cost of operating a truck,” Davis said.

He said when it reaches a point where rates meet carrier operating costs, it’s easy to think that’s when trucking capacity oversupply will resolve itself.

So far, though, there have been few signs carrier capacity is shrinking. According to Davis, back orders for new trucks are still eight months out, the price for a used truck is still double what it was before the pandemic, and exports of used trucks in 2022 were half the normal rate.

“Unless supply shrinks meaningfully or demand increases meaningfully, the typical seasonal variance in rates may be all we see through the back half of 2023,” he said.

But if trends sway from historical patterns the outlook may darken. Jim Gattoni, president and CEO of Landstar, said during a Feb. 2 earnings call if the economy softens more than anticipated it will be a struggle.

Historical patterns are not guaranteed, though. Jim Gattoni, president and CEO of Landstar System, told investors the outlook may darken if trends sway from the norm.

“When you read about the economists, you've got some that are dire, [saying] there's going to be a huge recession and others are talking about no soft landing, so I'm not going to go with what anything the economists say, because they're all over the map right now,” Gattoni said on an earnings call. “So trying to predict what's going to happen is hard.”

For a moment, a prototype FedEx robot made the last-mile delivery process compelling enough to be featured on late night television.

"This is the future right here," Jimmy Fallon said in 2019 as the company's autonomous bot, later named Roxo, delivered The Tonight Show host a pizza.

But despite the hype, the path to widespread adoption for sidewalk-roaming robots to deliver goods throughout the U.S. has been anything but straightforward. FedEx canned Roxo less than four years after its flashy debut, per an October statement. Amazon, meanwhile, ended field tests for its own delivery bot after it fell short on meeting customers' needs.

If logistics behemoths struggle to develop a successful formula for their delivery bot operations, can a long-term, sustainable business model ever be realized? Many of the executives, researchers and regulators interviewed by Supply Chain Dive say yes, and that current labor and inflation challenges could help the transportation mode get there sooner.

Still, to be truly successful, insiders say the industry still needs to confront major hurdles around funding, segment diversification and more.

Why delivery bots could gain post-pandemic momentum

Although FedEx and Amazon have taken their leave, the delivery bot sector still has seasoned and growing players. Leaders at these tech companies say using their robots to bring goods to consumers — versus a human courier using a vehicle — can offer advantages that have become more evident in recent years.

Chief among them is the potential to lower costs within the final mile of delivery, considered the most expensive step in the shipping process. With autonomous or remotely operated capabilities, delivery bots are insulated from climbing courier wages that standard providers pass on to the end customer. Additionally, they aren't as exposed to jumps in gas prices that took a toll on carriers — and then their shippers — last year.

"After COVID, you had challenges with labor," said Ali Kashani, co-founder and CEO of delivery bot developer and operator Serve Robotics. "Then you had inflation and the cost of labor going up, and then you have the cost of gas going up. Every one of these things that has happened has become a tailwind for us."

And while bots roaming the sidewalks don't have the range or capacity of gas-powered vehicles, they are well-suited to quickly respond to on-demand deliveries of small payloads originating from nearby businesses.

This has led many bot companies to grow their businesses by focusing on food and convenience deliveries. Serve's robots have completed orders on Uber Eats' platform for Los Angeles customers, and 7-Eleven recently partnered with the company for testing in West Hollywood, California. Plenty of food delivery operations are also taking place at colleges, with Grubhub rolling out partnerships with tech companies Kiwibot and Cartken to serve on-campus demand.

The question is if that is a large enough sandbox for these businesses to mature into self-sustaining operations.

For Coco, whose bots make restaurant deliveries in Los Angeles, food makes sense as the initial order category to focus on, said co-founder and CEO Zach Rash. It's a high-frequency order category with strong local demand and a need to be delivered quickly. However, he noted that over time there will be a need to diversify into other categories in order to maximize the use of its robots.

"You need a lot of scale and you need a lot of density," Rash said of the formula for long-term success in the delivery bot space. "Food is the best way for us to build up to that while making sure that we can maintain profitability on the way there."

Although bots won't become a one-size-fits-all approach to last mile delivery, there are other areas executives say the transportation method could see increased adoption in. Starship Technologies has robots delivering spare parts, testing supplies and samples in industrial campuses mostly in Germany, for example. And one day, industry players could be working directly with parcel vans and trucks to make deliveries, CEO Alastair Westgarth said.

"We're adding a new modality to delivery, not taking over the entire world of delivery," he said.

Complex challenges clash with immediate needs

The amount of deliveries completed by automated vehicles is still "barely measurable" today, acknowledged Cartken CEO Christian Bersch. To gain share from traditional transportation methods, companies operating robots will need funding to expand their service coverage, improve upon their existing technology and ultimately offer lower costs than competitors.

But economic uncertainty has thinned the pool of funds available from venture capital and private equity firms, company executives say. Starship, a major player in the robotics space, cut back its staff and service areas last year in a more difficult environment to secure funding.

"We wanted to make sure that we adjusted to that dynamic and focused on making sure our company's viable forever, so to speak," Westgarth said, adding that Starship prioritized further improving its unit economics.

Although larger, diversified companies may have the financial muscle to scale up their own bot programs, success in the space requires patience as hurdles related to adoption, infrastructure and regulations loom large. This includes current range limitations for these bots, which means reaching new customers in suburban and exurban areas will be difficult. Starship's Westgarth said cities and universities dominate the company's business, with 90% of its focus being in those two categories.

Long-term challenges can clash with near-term needs, as was the case with FedEx. The company said in its October statement that it canceled Roxo to "prioritize several nearer term opportunities" as overall demand for its services was slowing.

Companies exclusively focused on deliveries via bot can’t simply cut the cord, and they still need to grow at a pace that meets investors' expectations. Many executives say they remain cautious about ramping up too aggressively and without enough community buy-in, fearing a backlash similar to what e-scooters saw years ago. 

Bern Grush, executive director of the Urban Robotics Foundation, doesn't buy it.

"You want to tell your investor, 'We don't want to have 20,000 robots'?" said Grush, whose foundation aims to help member municipalities coordinate robot-related policies. "You want to tell your investor, 'We're happy with 12 robots'?...This whole industry needs to deliver a million things an hour."

Two big names in the drone delivery space — Zipline and Alphabet's Wing — unveiled major upgrades to their abilities to service customers earlier this month that may need some help in order to shake up last mile transportation.

While their respective upgrades differ, both have the same goal in mind: Scale up and reach more customers. Wing expects its drone delivery network will be able to handle millions of deliveries by mid-2024, while Zipline aims to operate more flights annually than most airlines by 2025.

For the two companies to achieve that, it will take more than a sizable investment to succeed — just ask Amazon, which has reportedly encountered drone safety challenges and limited delivery activity. They will need to lower operating costs by maximizing their networks' efficiency and get regulators and consumers on their side in order to deliver on the hype of drone technology.

Otherwise, it will take much longer for drones to deliver on the hype and become as ubiquitous in neighborhoods as delivery vans are, experts say.

Increasing density, adjusting regulations to lower costs

Carriers are working to increase density in the last mile delivery space, like having their couriers make as many deliveries as possible on a single route to minimize operating costs.

While drones are generally limited to lightweight payloads, a network can create its own version of density by ensuring its fleet is in constant motion, making pickups and deliveries as often as they can to sustain the business model.

"The worst thing is to have your vehicle, whether it's a drone or a truck, sitting idle," said James Campbell, a professor of supply chain and analytics at the University of Missouri-St. Louis. "The way this makes the most sense is if you can get the huge scale so your drones are flying all the time. You're spreading your fixed costs for the facilities over many, many drones and many, many deliveries."

Although delivery density is a critical part of the equation, it is only one avenue to lower operating costs, Eric Peck, CEO of drone logistics platform Swoop Aero, said in an email. Operators that design faster drones can respond to demand quicker and provide a more valuable offering to customers, which can translate into more profitable services. Increased delivery range can help, too, by unlocking new lines of business for drone companies, such as offshore maritime logistics.

One pilot monitoring multiple aircraft would also help operators maximize the return on their network investments, Peck said. A McKinsey report published in January affirmed this view, saying that with current pilot limitations in place, drone delivery struggles to be competitive with other last mile transportation modes in terms of operating costs.

The cost of a single-package drone delivery in which one person is monitoring the drone is about $13.50, according to the report. If a single drone operator is able to manage 20 drones simultaneously instead of just one at a time, the per-delivery cost plummets to around $1.80.

In the U.S., a waiver is required to operate multiple small drones with only one remote pilot, and operators also need certification in order to make drone deliveries beyond the visual line of sight of a pilot or observer.

For DroneUp, which is helping Walmart advance its goal of making 1 million deliveries a year by drone, being restricted by visual line of sight regulations has limited the delivery radius of its drones to about two miles. Stretching that further would have significant upside — DroneUp COO Anthony Vittone noted that 90% of the country lives within ten miles of a Walmart.

"Every mile that I add to that [drone delivery] radius triples and sometimes even quadruples the number of homes that have access to DroneUp delivery," he said.

Consumer buy-in, habits need to evolve

As delivery activity increases, companies also have to field concerns within the communities they operate in. Vittone said some potential customers may have a fear of the unknown with drone delivery, as is common with many new technologies. To reduce uncertainty, employees field questions from the public at Walmart stores where they operate and also conduct demonstrations.

Drone firms also have to consider potential disruptions their operations could create with the public. Wing, for example, has reportedly encountered noise complaints in Australia. The company said in emailed remarks to Supply Chain Dive that engaging with communities to answer questions and receive feedback is a top priority before launching new services.

"The reality is that drone delivery brings significant benefits — reduced traffic congestion, fewer emissions, expanded opportunities for businesses, and a greater level of convenience for consumers — and these become apparent once drone delivery arrives," Wing said.

If companies can achieve public buy-in, it's easy to see how drones could shake up traditional last mile delivery operations. They have speed as a distinct advantage over other forms of last mile transportation, as they are able to avoid ground traffic in their route to the customer.

But Campbell questioned what items beyond food and emergency medicine are needed in 15 to 30 minutes — a shift in consumer behavior may need to take place, similar to what happened when FedEx first launched express parcel delivery or when Amazon accelerated delivery speeds for online orders.

For drone delivery companies to reach that lofty, game-changing status, they will have to significantly expand their reach and capabilities first. With recent announcements in mind, that may be happening sooner rather than later.

"Things in this space rarely happen before anyone says, but I guess I'm a lot more optimistic than I used to be that this is finally coming," Campbell said.

With more shippers opting to power air cargo flights with sustainable fuel as part of sustainability goals, manufacturers and government officials are racing for ways to scale supply and lower prices. 

Prices of sustainable aviation fuel have skyrocketed in recent months as supply fails to keep up with demand, pushing some shippers and forwarders to take on higher costs. Bollore Logistics, for instance, purchased roughly 9 million liters of SAF in 2022 and was sold out by July, said Maily Treluyer, project leader for eco-responsible freight procurement.

“We’re going to double how much [SAF] we bought this year, and our target is to double [that amount] each year,” Treluyer said. “But the price is rising, so it’s a much bigger investment.”

With biofuels being a key to decarbonization in the air industry, Bollore Logistics isn’t the only forwarder seeing a surge in demand. As commitments from air freight stakeholders continue to drive sustainable transformations within the industry, air cargo companies and biofuel manufacturers are upping investments help ramp up SAF production in the U.S.

Limited SAF supply prompts U.S. investments

DB Schenker, which purchased more than 11,000 tonnes of SAF in 2022, also anticipates purchasing even more biofuel in 2023, a spokesperson told Supply Chain Dive. 

The forwarder recently announced a global CO2-neutral flight offer which enables shippers to choose SAF to power their flights on any global route.

“An increasing number of customers, including healthcare and pharma, as well as some high-fashion and consumer electronics brands [like] Lenovo are using our SAF air freight product,” the spokesperson said. “We notice both interest from large multinational corporations and brands, as well as from smaller companies.”

Although overall interest in greener transport solutions has grown over the last 6 to 12 months, some shippers remain hesitant to fork out the additional expenses as many companies are “closely observing their logistics costs,” the DB Schenker spokesperson said.

Currently, sustainable airline fuel is roughly three times more expensive than normal jet fuel, according to SAF producer Neste.

High prices are partly driven by tight supply: SAF is only produced in the U.S. West Coast and other select locations, though U.S. industry stakeholders have made active efforts to drive up capacity.

In February, sustainable fuels technology company LanzaJet secured a partnership with Chicago-based Marquis Sustainable Aviation Fuel to build an integrated sustainable fuels plant in Illinois with an annual expected capacity of 120 million gallons, according to a release from the company.

LanzaJet also secured $50 million in project funding for the company’s Freedom Pins Fuels SAF plant in Soperton, Georgia, slated to open later this year, according to an October statement. The production plant is expected to produce 9 million gallons of Alcohol-to-Jet SAF and roughly 1 million gallons of renewable diesel, annually, which will double U.S. SAF production and lower emissions by at least 70% compared with regular jet fuel.

United Airlines, which launched its Eco-Skies Alliance SAF program in April 2021, meanwhile invested in NEXT Renewable Fuels’ flagship biofuel refinery in Oregon, with production slated to begin in 2026. At full production capacity, the refinery is expected to produce up to 50,000 barrels of SAF and other renewable fuels per day, according to a November release.

Leaders call for government incentives to increase production

Even as producers look to increase biofuel production, SAF still only represents less than 1% of the total global jet fuel consumption, SAF producer Neste told Supply Chain Dive. 

In turn, industry members, including the International Air Transport Association, have called on governments to implement incentives to rapidly expand the use of sustainable aviation fuels in order to meet aviation’s commitment to achieve net-zero carbon emissions by 2050.

“There was at least triple the amount of SAF in the market in 2022 than in 2021. And airlines used every drop, even at very high prices,” IATA’s Director General Willie Walsh said in a statement. “If more was available, it would have been purchased. That makes it clear that it is a supply issue and that market forces alone are insufficient to solve it.”

Some state governments have already imposed incentives to boost supply. California's low carbon fuel standard, which encourages adoption of cleaner transportation fuels, is expected to encourage use and production of SAF, according to an IATA fact sheet.

On a federal level, the Biden administration announced new SAF policies in late 2021, committing to increase production to at least 3 billion gallons annually by 2030, according to a White House fact sheet. 

The U.S. also passed a set of SAF tax credits in the Inflation Reduction Act with the intention of cutting costs, rapidly scaling production, among other goals, as listed in IATA’s fact sheet.

“Governmental support plays a crucial role here as mandates or incentives can create the demand certainty needed to attract investments into new SAF production capacity,” Neste said.