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Current challenges in contract logistics - The key figures from Ti Research's Global Contract Logistics Report 2023.

For Leschaco contract logistics and dangerous goods logistics go together like butter and bread. Because contract logistics always shows its strengths where complex processes are involved, where it is not enough to simply transport goods from A to B, but where profound knowledge is necessary to keep an overview of complicated logistics chains in their entirety and to keep them under control, where a mistake really must not be allowed to creep in at any point of the process, so that the entire process is not put at risk. And where, if not in the transport of dangerous goods, does not everything depend on everything?

We have managed to win over an independent expert from Kontrastlogistik for a guest contribution to the dangerous goods logistics blog. Michael Clover, Head of Commercial Development at Transport Intelligence Ltd. exclusively presents the most important results of the current “Global Contract Logistics Report 2023”. This annual trend analysis is an important standard work for contract logistics companies all over the world. His company Ti is a leading logistics and supply chain market research and analysis company headquartered in the UK. Founded in 2002, its research reports, conferences and knowledge portals have made it an established advisor not only to the international logistics industry, but also to the World Bank, the UN, the World Economic Forum and the European Commission over the past 20 years.

Current challenges in contract logistics - The key figures of the Global Contract Logistics Report 2023

Michael Clover

A guest post by Michael Clover.

Head of Commercial Development, Transport Intelligence Ltd.

The COVID 19 pandemic has significantly shaken up the contract logistics market over the past three years. Increased costs, growing competition, and tight availability of storage space and transport capacity are some of the main challenges currently affecting the market.

Contract logistics - A definition

Let me briefly preface this with a compact definition of contract logistics. Contract logistics explains itself very well from its term: it refers to a logistics business model based on a contract, i.e., a service agreement. In contrast to an individual order, logistics service providers that provide contract logistics services perform a large number of complex tasks for their customers as part of supply chain management, from packaging and transport to warehousing, shipment tracking and assembly activities. These services are individually tailored to the customer’s needs. The combination of complexity, integration, individualization plus long-term nature thus distinguishes contract logistics from other logistics business models.

2022 was a difficult year for contract logistics

Ti sees 2023 as a turnaround year for the global economy and expects weak global economic growth of 2.8% in 2023 and a slow decline in inflation from 8.6% in 2022 to 7.0% in 2023. Of course, Russia’s invasion of Ukraine is also contributing to the subdued performance of the global economy. However, supply chain disruptions are unravelling. However, vertical e-commerce, a key driver of the logistics market in the mature markets of UK, Germany, USA and China, is weakening sharply after a pandemic-related high. The automotive market will also develop only very weakly in 2023. It is suffering from the shift to e-mobility and the continuing semiconductor shortage.

Overall, therefore, negative effects dominate on the demand side. On the supply side, however, we have positive things to report. Innovations in logistics technology enable more efficient use of logistics space and accelerate, optimize, and reduce the cost of processes. The automation of warehouse logistics by robots is particularly worthy of mention here. For example, DHL Supply Chain recently announced a $15 million investment in robotics solutions to improve the automation of its warehouses in North America.

If we look at the global contract logistics market, it was worth €273,939.5 million in 2022. This market grew by only 2.9% in real terms compared with the previous year. Apart from the pandemic year 2020, this was the weakest growth rate since 2014. The Asia Pacific region saw the best performance with growth of 4.3% and is presently the largest contract logistics market. By contrast, the market for contract logistics developed weakly in the other two major markets of Europe (1.9%) and North America (2.2%).

A look at the three major regional markets

The Asian market continues to be dominated by China. The country turned over €44,829.2 million in contract logistics last year, more than twice as much as the second largest market player, Japan.

The USA’s market leadership in the North American market is even clearer.

The most important European market is Germany, closely followed by the U.K.

The Value Added Services growth trend only plays a role in Europe and America

If we look at these three major regional markets in detail, they differ significantly. In North America and Europe, value added services, as services beyond transportation and warehousing, play a significantly greater role than in Asia.

At the same time, these value-added services are the area within contract logistics that will grow most strongly in the coming years. On the one hand, this is thanks to the rising demand for e-commerce logistics services and the associated increasing complexity of returns processes. Fast fashion, in particular, has one of the highest return rates, due to the practice known as bracketing, where customers buy multiple sizes of a particular item to find the best fit and then return the items they don’t want. Forrester and eMarketer estimate that the share of returns in e-commerce is around 20%, while the share of returns in brick-and-mortar stores is only between 8% and 10%.

The trend towards sustainable logistics services is also helping to influence demand for value-added services such as sustainable packaging and packaging materials. Ti expects the market for value-added services to grow from €24,733 million in 2022 to €28,771.8 million by 2027.

Key challenges in 3PL contract logistics

When asked about the biggest challenges in the 3PL market, i.e. in the area of transport and warehouse logistics, among the suppliers, a clear picture emerged:

Companies see rising costs as by far the biggest challenge in the coming years, followed by the economic downturn and problems with the availability of storage space. The shortage of skilled workers and the pressure for greater sustainability follow in 4th and 5th place.

The cost of warehouse space had already risen massively last year. Global rents rose by more than 20% in real terms year-on-year, significantly exceeding the previous record of 10% in real terms in 2021. On the one hand, demand for space had risen primarily as a result of growth from the boom in online retail, while on the other hand, construction costs for warehouse space had recently risen rapidly. Supply chain issues were also driving demand for warehouse space, as just-in-time delivery necessitated more decentralized warehousing of products. There were almost no longer any relevant vacancies anywhere in the world.

Growth comes from online retailing

Most logistics specialists expect growth impulses from online retailing. Online retailers often do not have sufficient skilled workers and warehouse capacities and are dependent on external capacities and the know-how of logistics specialists. This is even more true for providers in hybrid retail than for pure online retailers. The challenges for logistics specialists here lie primarily in automation, in system integration, in aligning logistics systems with customer requirements, and in realistic forecasting:

The pressure to innovate is growing

In the coming years, contract logistics, like other industries, will have to face the challenges of digitalization. Without automation and robotics, contract logistics will not be able to cope with the volatility and the need for single picking demanded by its customers. Warehouse automation encompasses a variety of technologies and equipment, from storage and retrieval systems, picking systems, sortation systems, conveyors and palletizing systems to data collection devices, software and automated guided vehicles. Another category of automation is conveyors, which move the retrieved material and direct it to the next appropriate operation.

Robots speed up processes in the warehouse, especially in online retail, when it is important to fill individual orders quickly and without errors. Robot picking technology alone is expected to reach a market value of $1.34 billion by 2025, according to the Wall Street Journal.

Innovations such as drones and 3-D printing will also fundamentally change processes in contract logistics. Drones will check inventories faster and with fewer errors than humans can. 3-D printing will tend to eliminate the need for multi-level warehousing.

The pressure for more sustainability is an innovation driver and a challenge

Evidence of sustainability in all logistics processes is becoming increasingly important for contract logistics companies. Most companies are also communicating their progress in this regard more or less aggressively in their corporate communications. DHL, UPS and Logisteed Japan, for example, are aiming to be climate neutral by 2050. Ryder aims to reduce fleet emissions by 10% by 2024, without committing to longer-term specific targets. UPS’s emissions reduction targets focus on its U.S. domestic express operations, as this is where most emissions are generated.

Green warehousing, facilitated by new technologies, is gaining strong momentum everywhere. The need for solar panels, wind energy, smart lighting and a whole host of other initiatives to make the industry more sustainable is growing everywhere.

Market growth slowly picks up speed from 2023 onwards

All in all, Ti’s market researchers expect the pace of growth to be slightly higher in 2023 than in 2022. The global contract logistics market is expected to grow by 3.8% to €284,458 million. The strongest growth is again expected for Asia, followed by the Middle East/North Africa region and Southern Africa.

contract logisticts regions

Growth rates for Europe and North America over the next five years are much slower than for Asia Pacific, with Ti expecting an average annual growth rate of 6.9% for the APAC region.

contract logistics 5 years

Summary: 2023 is a turnaround for contract logistics

All in all, 2023 can be described as a year of trend reversal. The market is slowly picking up speed again. Growth is accelerating, with the markets in Europe and North America developing relatively restrained. The main growth driver is the trend toward (hybrid) online retailing. A major challenge and opportunity is digitization. There remain as uncertainty factors in market development: the war in Ukraine, uncertainty in the automotive industry due to the technology shift to e-mobility, and supply bottlenecks in the semiconductor market. Overall, markets have become more uncertain and international supply chains less stable than in previous years. All of this also poses greater challenges to timely market analysis and forecasting. At Ti Research, we are meeting these challenges held on.

We publish the Global Contract Logistics Report every year with up-to-date data. The report examines current and future market trends and breaks down Ti’s brand-new market size, forecast and segmentation data for 2022, 2023 through to 2027. It is distributed by Ti at a price of £1,495.

If you have any questions about the study presented here or other market research data, please feel free to contact me directly:

Michael Clover, mclover@ti-insight.com,+44 (0)1666 519907, www.ti-insight.com

Cover photo: enanuchit – stock.adobe.com; all other illustrations vibrio based on Ti

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