Industrials sector report: labour challenges drive lasting cost pressures for logistics players

What challenges are third-party logistics companies facing?

During this period of uncertainty, third-party logistics (3PL) players could be “the ones who suffer most” as cost pressures such as fuel and facilities rent intensify, a former manager at Amazon.com Inc said. 

One of the challenges discussed in our Interview was “valuable real estate” in fulfilment operations being taken by products that were in high demand at the beginning of the pandemic, requiring the use of reserve locations. Rent and utility bills are also big pieces of the puzzle because many 3PLs do not own their warehouses. Those with an already significant number of locations across the US are “starting to feel it”, our expert said, “where their volume isn’t as heavy anymore and all of their costs across the board are going up”. As we heard from a former manager at ShipBob Inc, warehouse real estate costs are “out of control right now”.

On the labour front, the former Amazon.com manager acknowledged that churn and retention has “always been an issue” in the industry, with 90-day tenures common. However, since COVID-19 the strained labour force has been squeezed further. Wages have been driven upwards and our experts expect this will continue in the near term. The former ShipBob manager said labour pressures are “going to stick” and posited that variable cost per order (VCPO) increases are in fact 85-90% labour driven. “That’s why there’s this rush to automation,” they said. 

They noted that since the COVID-19 pandemic their VCPO has on average risen from “less than USD 1” to about USD 1.50. “It’s a little bit unique to me, in the fact that we lack automation, but I would imagine, due to wage growth, maybe a slight increase in materials like corrugate, someone like Amazon is still facing a higher VCPO.” 

Of all the aforementioned factors, labour, they said, is currently the industry’s “thorn in the side” that is making such increases sticky. 

To what extent can innovation insulate 3PLs from cost pressures?

Now more than ever as operating costs climb, the former Amazon.com manager said logistics players must “constantly innovate and improve their efficiency to remain competitive”. Rather than investing in expensive real estate, “these businesses are going to need to focus more on automation techniques” and implementing solutions such as advanced racking systems to increase storage capacity. “Going vertical… is the new game, so people are getting more out of smaller spaces, you see warehouses going 6-7 high now,” the former ShipBob manager said. 

However, according to the expert, some businesses are “going further and further into the abyss” and they questioned how effective simply bringing in robot pickers to reduce headcount really is at boosting productivity. “They just set the pace and make your error rate near zero. You can have slight headcount reductions, but I see it as just a reworking.” The specialist also highlighted the huge costs required to set up human-free warehouses and suggested that, overall, they are not confident that automation alone can reduce unit costs in the short or medium term. 

Indeed, reaching optimal efficiency will require a blend of solutions, particularly in the current macro environment. Rate shopping will be critical for businesses to ensure they are “always choosing the best option”, be it the lowest-price fulfilment centre, the fastest shipping speed or the lowest-price packaging for a particular product, the former Amazon.com manager said. 

3PLs expected to “suffer the most” from cost increases

When it comes to passing on cost increases – which we heard could range from USD 0.05-0.20 per parcel (currently USD 1.20-1.80) – 3PLs are expected to bear the brunt of the impact, according to our Interview. “It might get passed down to the merchant, but… the customer is not ending up paying more right now.” 

In response to these shifting dynamics, the former manager at Amazon.com expects consolidation among the smaller players “who have survived for many years… because this is a business that people need”. The reason for this, they said, is because 3PLs are ultimately getting paid less per order whilst facing the issues discussed above. “Ultimately, I see the 3PL players as being the ones who suffer most here. I don’t see the volume going lower due to this.” 

Is there a credit issue brewing in the 3PL industry?

Another factor at play is 3PL collection cycles and receivables health. According to another Forum Interview, there is “concern” regarding the growing number of delinquent accounts in the 90-day-plus category, a former executive at Central Credit Audit LLC said. “It’s starting to show signs of the recession.” A warning sign of broader credit issues in the logistics sector would be if 90-day-plus accounts start to grow by 15% YoY from the current rate of approximately 3-5%, they said. With collection cycles being stretched and going “further and further beyond terms”, 3PLs are starting to restrict who they extend their credit to. “As you can expect, with being a little bit more picky and choosy about who we do business with, we are obviously decreasing some of our volumes,” the expert said. “You’ll start to see expenses being cut at the corporate level. You’ll see some lay-offs.”

Is the 3PL industry ripe for M&A?

Across Interviews, experts also pointed to the longer-term trend of marketplaces increasingly looking to bring their logistics in-house. However, the former Amazon.com manager said “growth has slowed right now” given the high costs associated with such a move, and they also believe there will always be a need for 3PLs – of which there are over 14,000 in the US. 

But the landscape could soon change. “You’ll likely start to see these 3PLs get acquired or partner or have strategic alliances,” they said. “Ryder did this, Geodis has done this, ShipMonk has done this, Shopify has done this.” The former ShipBob manager is of the view that there “needs to be more” industry consolidation, as “scale is the name of the game for logistic pricing”.