E-commerce Parcel Market From Rapid Growth to Smooth Transition?

Transitioning from rapid growth to a smooth e-commerce parcel market

The current e-commerce environment is similar to the gold rush around Sutter’s Mill in 1849, where prospectors tried to find value while eliminating unreasonable factors. A clear phenomenon now is that the dramatically increased electronic commerce during the pandemic has now started to stabilize slightly, but it is still expected to grow at an astonishing rate. The global retail e-commerce sales volume (in billions of US dollars)

Bill Hutchinson is a senior supply chain personnel of companies such as Dell, Sears, and Belk, and now serves as the Senior Vice President of Corporate Logistics at WestRock, a large paper product manufacturer. He said, “During the pandemic, parcel carriers not only face the problem of increased volume, but also face rapid growth of ‘unattractive’ goods from stores and other low-density sources, which poses a challenge to carriers’ transport networks. The sudden arrival of the pandemic caught them unprepared. And usually, stores do not have powerful packaging solutions, dock space, picking density, or large logistics areas for consolidation.”

At the same time, e-commerce has also brought about various fulfillment modes and the emergence of a large number of fulfillment centers, which are usually smaller in size and closer to customers. However, which fulfillment mode is correct? From manufacturer to customer? From distribution center to customer? From store to customer? Or buy online and pick up in-store (BOPUS)?

The most advanced retailers will balance these processes and use distributed order management algorithms to allocate orders throughout the supply chain to balance inventory location, expected profit margins, logistics costs, and customer proximity.

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This article discusses the views of some logistics experts and people related to transportation business on the overall impact of e-commerce on national goods transportation through conversations with them. One thing that can be certain is that this is a constantly changing competitive environment.

The parcel market will continue to evolve with the development of e-commerce

Firstly, parcel services will continue to evolve with the development of e-commerce. During the epidemic, online shopping saw a significant increase, which also drove the rapid development of the parcel market. Now, this situation of crazy demand growth has greatly weakened, as Satish Jindel of SJ Consulting said, it has “leveled off.” When people see a period of rapid growth, they often think it will continue and make wrong judgments about capital expenditures, capacity expansion, and personnel deployment.

Global parcel volume (billions)

E-commerce did take off, but once the most severe stage of the epidemic passed and society reopened, consumers turned from buying “things” to buying services, such as air travel, catering, hotels, and outdoor activities. As early as 2000, some predicted that e-commerce would grow to account for 50% of sales, but this prediction has never been realized. Today, it accounts for about 18% of sales.

Former UPS executive Brian Sternberg observed that by 2023, the overall freight market will slow down, and labor and capacity issues will be alleviated. Although the problems have eased somewhat, the recent increases in UPS and FedEx basic rates and surcharges will be a sustained action.

At the same time, more and more small regional freight players are flourishing, trying to take business away from these two giants, and more and more third-party logistics (3PL) companies are joining the industry. Shippers should consider introducing new competitors to help balance the competitive environment. However, it should be noted that while using 3PL may be reasonable and helpful, they must be carefully evaluated to see if they meet the demand, network, and budget.

Aside from some periodic adjustments, there is a significant difference in the quantity and scale of packages in the B2C (business-to-consumer) sector and the large-scale B2B (business-to-business) consignor sector, so it is unlikely that the growth of package volume will experience any meaningful decrease. This is a trend, and package volume is unlikely to return to previous levels in the future.

Brian Broadhurst, Senior Vice President of Transportation Insight Supply Chain Consulting, stated that although the capacity constraints of packages will be reduced by 2023, the industry will still feel the effects of the e-commerce growth from 2020 to 2021. The most obvious is the record rate increase in 2023, which is caused by the capacity constraints of the previous few years.

With the announced rates rising at a record pace and the market slowing down, the package market will reach a critical point, and consignors will be incentivized to renegotiate contract discounts. In addition, the UPS team union agreement will expire on July 31, 2023, and the negotiation results will directly affect UPS’s pricing strategy.

E-commerce development is reshaping the last-mile delivery network

During the pandemic, the issue of reverse logistics gradually emerged. When people were trapped at home, many people were happy to order five pairs of shoes, pick one, and then return the rest. This made online shopping attractive and convenient, but the cost of reverse logistics also skyrocketed.

According to data from e-commerce consulting firm Invesp, as many as 30% of online orders last year (about $100 billion) were returned, while the return rate for physical stores was only 8.89%. In addition to the need for manual inspection and sorting of returns and repackaging, the current cost model is unsustainable.

According to a recent report from the Wall Street Journal, the pandemic-driven changes in consumer behavior that have affected the retail supply chain over the past year are beginning to subside, making things increasingly difficult for e-commerce companies. Ashutosh Dekhne, Americas Supply Chain and Operations Leader at EY, said, “In the past, brands and e-commerce focused primarily on online and in-store experiences, believing these to be the most important factors for consumers. However, as the shift to e-commerce continues, the end-to-end delivery experience has become equally important, if not more so, and has an impact on consumers’ choice of brand.”

Outlook for the end-to-end delivery market (in billions of dollars)

End-to-end delivery costs (as a percentage of total transportation costs)

Due to the existence of multiple pickup points (stores, distribution centers, homes, cross-docks), multiple delivery modes (small trucks, delivery vans, robots, drones), and multiple destination types (homes, commercial, lockers), end-to-end delivery has become increasingly complex. Ashutosh Dekhne said, “The challenge is not only in the large number of combinations, but also in the high degree of unpredictability – the type of origin and destination, as well as the service level, are usually only determined upon receipt of the order.”

Raj Kumar, EY’s Logistics and Fulfillment Leader, said that innovative delivery mechanisms are emerging to supplement traditional human-driven models. Innovative technologies enable drones, robots, and autonomous vehicles to meet consumers’ delivery needs and service expectations. We expect the market to grow from about $8 billion in 2022 at a compound annual growth rate of 7% to about $14 billion in 2030. Freight carriers need to evaluate and quickly adopt these new technologies.

According to Scott Fata, Director of Supply Chain and Operations Practice at Accenture, as e-commerce grows, the “I want it now” experience will become increasingly important and will become a repetitive demand. Therefore, the future freight industry will have more forward inventory locations to deliver products to consumers in one day or less. This will break traditional long-haul delivery services and require more region-specific fleets. LTL carriers can take advantage of this opportunity to truly become local end-to-end delivery services.

The Managing Director of Deloitte’s retail and consumer practice, Kevin Mahoney, also expressed his forward-looking views. He said: “For many people in the e-commerce field, the driving force for change has already emerged, which is based on the rise in costs and profit erosion. The rise in costs is mainly due to the increase in transportation costs and higher customer service expectations.”

In Kevin Mahoney’s view, the growth of e-commerce has had a significant impact on the supply chain network. Customers’ attitudes have been reset, and they expect high-level service. In the future, this expectation will only continue to increase, and freight companies will face challenges in making decisions to meet this expectation between speed and inventory. Both of these put pressure and challenges on existing performance and transportation infrastructure.

E-commerce growth brings return issues

According to Kevin Mahoney, the most exciting thing about e-commerce delivery is the focus on innovation, alternative delivery models, and the use of a crowdsourcing supplier ecosystem. He said: “We are incorporating fulfillment into our customer and product strategy, providing services, using pickup and delivery sites to increase product launch speed and obtain data needed to unlock the near-term reality of using drones.”

However, with the continuous growth of e-commerce, the volume of returns is also increasing, leading to supply chain disruptions and significant cost impacts on the entire supply chain. He added: “We are rethinking the issue of returns, developing transportation strategies to handle the growing volume of returns, offset costs, and develop logic for inventory-based fulfillment decisions to put products back on the shelves and increase the likelihood of close-to-full-price sales.”

Cass Freight Index-Expenditures (January 2010-December 2022, January 1990=1.00)

Cass Freight Index-Shipments (January 2010-December 2022, January 1990=1.00)

Summary

Although people have been accustomed to the fluctuations in prices and freight volume, and understood the impact of peak periods, transition periods, and non-peak periods on the market before the epidemic, the current market volatility and speed have irreversibly changed many people’s accustomed patterns. People often talk about making supply chains more resilient, but achieving this goal requires cross-domain changes in planning and operational execution. Cross-departmental and cross-enterprise cooperation is critical to improving supply chain performance. Another buzzword discussed is “optimization.” However, unilateral optimization of one’s own supply chain link often leads to sub-optimal overall performance. Establishing trust across enterprises and focusing on overall benefits is essential for building better and more resilient supply chains.

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