Current trends and implications for the logistics industry
Many experts expect that waning demand will help ease the supply chain bottlenecks currently plaguing the logistics industry. According to modeling by Tradeshift, there has been a fall in overall demand across a variety of sectors. This would normally be a cause of concern from both a macroeconomic and a microeconomic perspective. After all, demand is the engine of the economy. However, from a logistics management point of view, this reduction in demand may turn out to be a welcome relief given the challenging bottlenecks the industry has been dealing with.
Finding relief from the unlikeliest sources
Reduced demand in the mainstream economy means less need for transportation and logistics capacity. That can be a relief for an industry dealing with seemingly endless backlogs and delays. The latest statistics indicate that activity in the third quarter of 2022 was 8% lower than originally anticipated. And this does not seem to be an anomaly; similar patterns were also seen in the second quarter. Such a decline in two consecutive quarters may be indicative of an industry trend. Of course, it is important to remember that the logistics industry needs demand to function, so the hope is that the current fall is not so precipitous as to dry up customers.
Nevertheless, from an operational point of view, the reduction in demand has allowed the industry to better manage its capacity, which is already being stretched to the breaking point. The Index of Global Trade Health confirms these trends in its report. For example, global supply chain activity reduced by 5% in the third quarter, and new orders are drying up. A recent study commissioned by a key provider of digital trade data shows falling activity in logistics, transport, manufacturing, and retail in the third quarter. Some argue that this is a reflection of the cost-of-living crises that have gripped virtually all nations.
Costs of living are making consumers more cautious
As the costs of living keep rising, many are reconsidering purchases that are luxurious. Even the essentials must be rationed to ensure that families can make ends meet. This squeeze in spending is not only being managed by government at the macro and meso level, but also being dealt with by individuals at the micro level. The idea is that those who can tighten their belts will stand a much better chance of surviving the current cost-of-living crisis when compared to those that continue to spend at the levels they once did during the boom periods. Such cautious spending habits are reflected in global international trade.
The headlines in the statistical reporting confirm these trends, if not the specifics. For example, global orders are now falling below 7% in the third quarter. The previous quarter the orders had fallen by 6%. Experts have analyzed this and concluded that it is the most significant half-year drop since the height of the pandemic when the global economy seemed in danger of coming to a standstill. Manufacturing has dropped by 11% in the third quarter when compared to the expected rate. The retail supply chain activity is down by 9%. Overall, this is the slowest growth that has been experienced in 18 months.
A global economy struggling to get back on its feet
Although the global economy has generally been on the mend, there are indicators of a start-stop pattern, which could signal a long road ahead. According to Tradeshift CEO Christian Lanng, this trend will be advantageous to logistics actors, who have struggled to deal with an overburdened industry. In other words, recent supply chain bottlenecks may be easing in line with the falling demand. Lanng also sees indications that shipping costs are beginning to fall.
Nevertheless, it is important to remember that waning demand is a double-edged sword. On the one hand, it can ease operational difficulties. On the other hand, it can bite into the customer base which supports the logistics industry. Smaller suppliers must be particularly wary of swapping one form of pressure for another. If customer numbers are falling, these small actors will struggle to remain relevant in a competitive industry. Of particular concern would be smaller suppliers closing due to low demand, which might lead to some of the challenges of the COVID-19 pandemic returning with a vengeance.
Balancing low demand with business survival
The analysis by Tradeshift indicates that Europe is now the epicenter of the latest economic slowdown. For example, supply chain activity across the Eurozone fell by 6%, and consumer spending is virtually being wiped out. This comes in the midst of an energy crisis triggered by Russia’s invasion of Ukraine. All of this has placed significant cost pressures on supply chains, which must respond appropriately to changes in demand patterns. It is also worth remembering that much of Europe is still recovering from the ravages of the COVID-19 pandemic.
A slightly different picture is emerging in the United States. Yes, momentum is slowing. However, the fall is at a gentler pace than the rest of the globe. For example, total transaction volumes in the USA were just 2% below the anticipated level in the third quarter. The situation in China is also different, as local supply chain activity grew at a noticeably healthier rate in the third quarter, only falling 1% below anticipated rates.
Stabilization in the USA
Early indications are that American supply chains are stabilizing. The cautionary caveat on this trend is that supply chains will hold up if consumers continue spending. This, in turn, could translate into lower operating costs. Of course, if consumer spending falls, supply chains will be in another type of trouble. This is an unwanted scenario that experts will be watching carefully.
Europe shows a much more mixed picture on the road to recovery. The continent faces a sitting energy crisis and is still struggling to balance security of supply with sustainability and access. In addition, the supply chain is now subject to geopolitical pressures and imperatives, prompting many organizations to review the resilience of their supply chains.
Overall, waning demand presents an opportunity to better manage the logistics industry. However, this assumes that demand does not fall so much as to endanger small businesses. The USA and China seem to be coping well with today’s challenging logistics landscape, but Europe faces significant challenges on this front as it struggles to recover from the pandemic and a severe ongoing energy crisis.