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"State of Logistics Report": U.S. business logistics costs hit $1.45 trillion in 2014, up 3.1 percent from 2013

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Logistics costs accounted for 8.3 percent of U.S. GDP last year, according to the annual report issued by the Council of Supply Chain Management Professionals (CSCMP).

The cost of operating the U.S. business logistics system in 2014 rose 3.1 percent to slightly less than $1.45 trillion, equal to about 8.3 percent of the nation's gross domestic product (GDP), according to the 26th annual "State of Logistics Report," released on Tuesday in Washington, D.C. The report is issued by the Council of Supply Chain Management Professionals (CSCMP) and presented by third-party logistics provider Penske Logistics.

The report said that 2014 was the best year for U.S. logistics since the start of the Great Recession in 2007. Barring unforeseen events in this year's second half, 2015 should show strong growth despite a weak first quarter caused by inclement weather, a stronger dollar that curbed export activity, and problems caused by labor strife at West Coast ports, the report forecast. "The U.S. economy is on fairly solid ground" with unemployment falling, real net income and household net worth inching up, low to moderate inflation, and declining oil prices putting more money in Americans' pocketbooks, wrote Rosalyn Wilson, the report's author.

"We're actually seeing some very sustained growth, in my opinion," she added in remarks during the press conference where the report was released.

Logistics costs as a percentage of GDP, one of the report's most frequently cited data points, has stayed within a range of 8.2 percent to 8.4 percent since 2010. However, Wilson, in an e-mail interview prior to the report's release, said that the current levels are likely unsustainable and that the ratio will eventually rise to levels of 9 to 9.5 percent as a dramatic tightening of motor carrier capacity causes freight rates to climb. That truck rates did not surge in 2014 was one of the biggest surprises in the report's findings, Wilson said in the interview.

While truck revenues rose 3 percent over 2013, tonnage gained 3.5 percent, meaning that rates remained relatively flat, according to the report. Trucking costs—measured as carrier revenues—accounted for slightly less than half of the total expense of the nation's logistics system.

"Carriers seem to still be spooked by the lean years when there was not enough freight to go around, and they are ... reticent to pass up freight even if (rates) are negotiated downward," said Wilson, a senior business analyst with Pasadena, Calif.-based Parsons Corp., an engineering and construction firm. She said shippers succeeded last year in whittling down proposed rate increases from 6 to 8 percent to levels approaching 2 percent. But that practice cannot continue indefinitely, especially as carrier capacity shrinks to extraordinary levels, Wilson said. "At some point, rates have to rise, and I think we'll see that by the end of this year," she said at the press conference.

When the pricing picture turns, it will likely be a quick and sharp change with one of the big carriers taking the lead and others following suit, Wilson said in the interview before the report's release. In her report, she advised shippers to pay more attention to carriers' capacity guarantees than to the rates they charge, and to work with carriers to optimize their equipment utilization. Shippers that do both stand the best chance of mitigating 2015 rate increases because carriers will be more willing to keep rates steady if they know their equipment and drivers were being turned faster and more efficiently, she said.

Speaking at the press conference on a panel with other logistics professionals, Mary Long, vice president of logistics and network planning for Ann Arbor, Mich.-based food chain Domino's Pizza, Inc., said Domino's is trying to make greater use of its private fleet for backhauls and has invested in additional equipment and drivers. Shawn E. Wattles, director of supply chain logistics for Chicago-based Boeing Co., said the aircraft manufacturing giant is also trying to maximize private fleet use, although the fleet only operates in Washington state, formerly the locale of Boeing's corporate headquarters and where it still maintains sizable operations. An increasing number of shippers are looking for hybrid solutions that allow them to take advantage of both for-hire and dedicated contract carriage, added Joe Carlier, vice president, sales for Reading, Pa.-based Penske Logistics. Penske has seen an increase of about 20 percent in the number of customers requiring such a solution, he said.

Although it is hard to match people, equipment, and infrastructure resources with demand, BNSF Railway is "in good shape" when it comes to capacity, velocity, and service, said Dean Wise, vice president of network strategy for Fort Worth, Texas-based railroad. Nevertheless, the rail industry, which has made record-high investments in infrastructure in the past few years, is concerned that port congestion could shift to the East Coast, Wise said. Another worry is that federal funding for highways and intermodal connectors, together with a slowdown in the issuance of permits for various expansion projects, could make it more difficult to maintain the gains that have been made, he said.

Panelists predicted the effects of the recent congestion and delays at West Coast ports, caused by the nearly year-long contract fight between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), would linger for some time to come. Ronald M. Marotta, vice president, international division for Yusen Logistics, a global freight forwarding and logistics concern in Secaucus, N.J., said the efficient, service-conscious Port of Savannah has gained permanent new business from shippers that had a positive experience after re-routing freight that would normally have entered the U.S. over the West Coast. Although activity at the West Coast ports is "more fluid" with "better velocity" than before, all stakeholders must continue working toward permanent improvement, Marotta said. "We've had some success, and I'm very certain next year will be better," he said.

The third-party logistics (3PL) segment turned in a strong performance in 2014 with net revenue—revenue after factoring in transportation costs—rising 7.4 percent, according to the report. Domestic transportation management and dedicated contract carriage services rose by 20.5 and 10.4 percent, respectively, as tightening truck capacity drove demand for those services. International transportation management and value-added warehousing and distribution services each posted low-single-digit increases. The overall 3PL market is expected to rise in 2015 by 5.7 percent. The 3PL data in the report came from Armstrong & Associates Inc., a consulting firm that closely covers that segment.

Rail intermodal volumes rose 5.2 percent last year, continuing a pattern of solid multiyear growth for the sector as it on-boarded new business as well as conversions from truckload services. Rail carloads rose 3.9 percent, while overall revenue increased 6.5 percent. Ocean containerized imports and exports rose slightly year-over-year, while air cargo revenue declined 1.2 percent, paced to the downside by a 3.6 percent drop in international revenue. The current downward trend in exports will likely continue in the coming months as the strong dollar continues to make U.S. products more expensive in overseas markets, Wilson said. "I don't see exports recovering, at least before the end of the year," she said.

INVENTORY CARRYING COSTS ON THE RISE

Inventory carrying costs rose 2.1 percent last year despite a 4.8 percent decline in the interest component as interest rates remained at historically low levels. Business inventory levels increased by 2.1 percent as taxes, obsolescence, depreciation, and insurance rose by 1.2 percent due to the growth in inventories. Warehousing costs rose 4.4 percent, capping off a second consecutive solid year as demand for warehouse space from e-commerce providers remained strong. U.S. retail e-commerce sales hit $237 billion 2014, up from $211 billion in 2013, according to the report.

In the e-mail interview, Wilson forecast further increases in carrying costs as interest rates finally begin to rise and warehousing demand—and expenses—continue to escalate.

The inventory-to-sales ratio, which measures a business' inventory investment in relation to its monthly sales, rose rapidly in 2014, the report found. The ratio ended 2014 at 1.35, its highest level since late 2009. A rising ratio generally indicates declining sales or excess inventory levels.

The rise was due largely to wholesalers and retailers ordering more goods in anticipation of labor- and congestion-related delays at West Coast ports, combined with slower-than-expected holiday sales, the report said. The wholesale and retail ratios leveled off and the ratio for manufacturing began to trend downward in Q1 of 2015, according to the report.

In an interview following the press conference, Wilson said she expects the overall inventory-to-sales ratio to decline. Rising inventory carrying and obsolescence costs, combined with escalating warehousing expenses, will provide an incentive for companies to get their inventory levels under control, she said.

"I'm concerned that inventories are as high as they are, but ... manufacturers are using up the supplies that they have. Nobody is ready to make big investments in more inventory," she said.

Editor's Note: This story was updated on June 25, 2015.

Mark Solomon is executive editor—news at DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly. Toby Gooley is Editor of CSCMP's Supply Chain Quarterly.

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