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Annual "State of Logistics Report" shows industry looking in cloudy rear-view mirror
The 28th annual "State of Logistics Report" painted a somber picture of logistics activity during 2016, with expenditures declining for the first time since 2010 and logistics spending as a percentage of U.S. gross domestic product (GDP) dropping to its lowest level since the depths of the Great Recession.
The annual report, prepared by consultancy A.T. Kearney Inc. for the Council of Supply Chain Management Professionals (CSCMP), and presented by third-party logistics (3PL) provider Penske Logistics, found that spending last year was constrained by uneven economic growth, overcapacity across virtually all modes, and corresponding rate weakness. Total logistics expenditures—framed in the report as "costs"—fell 1.5 percent year-over-year, to $1.392 trillion. The decline contrasted with a 4.6 percent increase in spending, compounded annually, from 2010 to 2015, as the U.S. economy and the logistics businesses supporting it fitfully emerged from their worst downturn in more than 70 years.
Logistics costs as a percentage of GDP, traditionally viewed as the report's headline number, came in at 7.5 percent in 2016, the lowest point since 2009, when the ratio stood at 7.37 percent. The ratio moved in a very tight range between 2011 and 2015, and ended 2015 at 7.84 percent.
In years past, a ratio as low as last year's would have been viewed as positive because it underscored the supply chain's strides towards greater efficiencies. For example, the ratio was well into double-digit levels during the report's early years as transportation and logistics providers threw off the yoke of regulation in the late 1970s and early 1980s and slowly adjusted their models to manage more efficiently in a free-market environment. Indeed, the first-ever drop in the ratio below 10 percent, which occurred in the early 1990s, was a cause for celebration at the time.
Modal spending: some up, some down
Truckload expenditures, the largest line item among the cost categories, fell 1.6 percent year-over-year to $269.4 billion. That may not be the case by the time next year's report comes out. It is "not sustainable" for so many carriers to accept noncompensatory margins; shippers should therefore expect to see higher trucking prices in the fourth quarter of 2017 and first quarter of 2018, said Marc Althen, president of Penske Logistics, at a June 20 press conference in Washington where the report was released.
Rail carload expenditures, buffeted by continued weakness in coal volumes and declines in spending on energy exploration and development caused by lower oil prices, fell by 13.8 percent, according to the report. Intermodal spending declined 2.5 percent. Rail demand was "anomalously low" last year, and volumes and associated spending should rise this year, said Beth Whited, executive vice president and chief marketing officer for western railroad Union Pacific Corp., at the press conference.
Whited said she expects single-digit volume increases in 2017, with coal and grain exports leading the way, and "a significant jump" in 2018 as new chemical production facilities begin to pump out product.
Spending on water transportation, which covers both domestic and U.S. import and export traffic, dropped 10 percent, reflecting persistent liner overcapacity and rate pressures on international trade lanes, according to the report. Airfreight spending, which includes domestic and U.S. export and import cargo, rose 1.5 percent.
Not surprisingly, parcel spending, supported by increases in demand for e-commerce fulfillment and delivery, jumped 10 percent, the report said. For the first time in the report's history, parcel moved ahead of rail in modal spending.
Whited cautioned shippers that rates could rise across the modal board sooner than they think. "Shippers have enjoyed unrealistically low supply chain costs" for years, Whited said. While railroads have shown "good discipline" in pricing, other modes have not; as a result, there will likely be "more consolidation and rationalization" in those modes, which could raise prices, she said.
Warehouse space fell 10 percent from the first quarter of 2016 to the same period in 2017, the report said. However, spending on warehouse services rose just 1.8 percent over 2015 levels, about half the pace of its five-year compounded annual growth rate. A sizable decline in the weighted average cost of capital drove down the financial costs of carrying inventory by 7.7 percent. A third category of inventory carrying costs, which include obsolescence, shrinkage, insurance, and handling, fell 3.2 percent.
These muted levels may not last, however. Decisions by 21 states to raise their minimum wage and the need for e-commerce warehouse operators to invest in expensive automated material handling systems will have "a significant effect" on warehouse costs, Sean Monahan, an A.T. Kearney partner and the report's lead author, said at the press conference.
The decline in transportation spending came amid a rise in energy prices off of multiyear lows. This marks the second straight year that the two trends moved in opposite directions, reinforcing the notion that energy is no longer the primary factor driving logistics spending. Rather, consumers have become the main influence, the report said.
The report's authors said the logistics industry "appears destined for a prolonged bout of cognitive dissonance" as it reconciles subpar GDP growth—first-quarter output rose a scant 1.2 percent— with rising stock market values, better consumer confidence data, and ongoing investments in information technology.
Yet the inherent uncertainty has not slowed the pace of change as newcomers challenge established players for market share and incumbents refresh their business models, the report said. In one of the report's most provocative forecasts, the authors said they expect more large shippers to follow the lead of Amazon.com Inc. and either establish or expand their in-house logistics operations. Seattle-based Amazon, the nation's largest e-tailer, has added aircraft and truck trailers. It is also constructing an air cargo hub in Cincinnati to support its two-day delivery service, Amazon Prime.
For now, caution rules the day, reflected in declines in the closely watched inventory-to-sales ratio, which measures on-hand inventories in comparison to sales levels, the report said. The authors acknowledged that the declines could be attributed to more accurate forecasting tools that minimize the risk of overordering. However, a more plausible case can be made that companies unsure about future demand are holding inventory levels closer to actual retail sales figures instead of stocking up in anticipation of future growth, the authors said.
Editor's note: This article has been updated with quotes from the June 20, 2017 press conference.
CSCMP's Supply Chain Quarterly Editor Toby Gooley contributed to this report.
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