Cost management pressures and managing the cyber threat remain key concerns
Prior to the COVID-19 outbreak, eight out of ten transport and logistics providers failed to consider pandemic as a key risk to their business according to Aon's recent COVID-19 Risk Management and Insurance Survey. Why it was so far down the list of risk priorities, probably reflects a prevailing attitude – not restricted to this industry – that such a disease would remain a more regional threat.
After COVID-19, few will downplay the risk of a future pandemic and it now ranks third as a potential future shock in Aon’s survey as transport and logistics providers seek to ‘reshape’ the businesses with a focus on protecting people and assets, and cost management.
Some have been hit hard
Like some other industry sectors – agrifood for example – it’s already clear that parts of the transportation and logistics industry have performed well through the pandemic upheaval, while others have been less successful. Businesses hit hardest were probably those logistic providers who support manufacturing.
If you take an auto manufacturer, for example, they use various third-party logistics providers to manage their warehouses and support their manufacturing facilities, but because they couldn’t get parts, manufacturing came to an abrupt halt. If you’re a logistics provider in that space, you will have seen a big dip in revenues.
Equally, the international air and ocean companies that handle goods coming out of Asia saw a sharp downturn early on, but business kicked back in several months into the pandemic. Those companies have probably broken even over the year, particularly where premium air freight might have made the difference.
Some have profited
The side of the transportation and logistics industry which has seen a boost from the pandemic are those companies doing the final mile delivery, supporting the ecommerce sellers like Amazon and Alibaba. Many people have converted to buying products online – accelerating a trend already impacting the sector well before COVID-19 – which meant delivery companies blew through their capacity and had to go out and get more. Consequently, nearly half (45%) of businesses in this area, according to Aon’s survey, said they thrived during the pandemic.
There is, however, a downside to this unleashed demand. Many logistics providers have been operating on fixed contracts for two or three years and can’t adjust their rates. It created a dynamic in the US, for example, for intermediaries who were having to find more truckers to move products but had to pay a premium to get them because of the high demand, while being unable to charge their clients any more. Hopefully that’s a short-term problem and when they get through the contract renewal cycle, they can make some adjustments and benefit in the future. But it has put additional cost stresses on the marketplace.
As the industry responds to the pandemic, it’s interesting to see that revisiting business strategy places only fifth on the sector’s ‘reshape’ priorities, according to Aon’s COVID-19 Risk Management and Insurance Survey. Logistics is subject to the demands of suppliers and manufacturers who are revamping their just-in-time inventory, and building up local capacity to build in local stockpiles locally and adopting a more strategic use of warehousing and inventory to better weather future storms. This will have an impact on how logistics providers are asked to service many industries.
Putting people and assets first
Protecting people and assets is, however, first on the ‘reshape’ agenda. A couple of major concerns are making sure transportation and logistics providers have the people to make it work and that their processes are efficient as possible. The industry was antiquated but a lot of investment over the last five to ten years has made it more tech savvy and reduced the number of human touch points. Having a readily available labour force is paramount, though pressure on costs is likely to see a rightsizing of the white-collar workforce in 2021.
As technology plays a greater role in generating efficiencies and cost management, and the industry transitions into digital and AI, so will the cyber threat. We’ve seen first-hand that clients with major international networks have been brought to their knees by a cyber event and it has cost them a lot of money. If you’re a warehouse provider and you’re providing cold storage for food products, for example, it’s not out of the question for a hacker to get into an automated temperature control system, and change that temperature by five degrees to ruin the products and trigger expensive liability lawsuits against you.
Beware the cyber exclusions
From an insurance perspective there are exclusions for cyber in most standard policies – a property or marine liability policy will all exclude cyber – so, if the business doesn’t have a separate cyber programme it could be at risk from a severe balance sheet shock. It’s why, as the sector goes through this major transformation, it cannot afford to relax its risk management. The pandemic will end, but the changing nature of the transportation and logistics industry – and its risk profile – will continue to accelerate.
Climate change is also impacting the war for talent. Many people – particularly younger employees – only want to work for a business that identifies with their values in areas like the environment and sustainability. That means businesses will have to not just talk a good game on climate change but also make good on their promises if they want to attract the brightest and the best.
To find out more about the impact of the pandemic on transportation and logistics sector and how future decision making will be shaped, read Aon's COVID-19 Risk Management and Insurance Survey report.