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State of Logistics Report
January 24, 2020

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State of Logistics Report

A tale of transition

E-commerce and omnichannel retail are pushing aside the traditional drivers of business logistics costs, putting the U.S. consumer in the driver's seat when it comes to cost, service, and strategy. The shift may be permanent.

Do you remember the old song "What a Difference a Day Makes"? Change "day" to "year," and you've pretty much summed up the impression one gets from reading the latest annual "State of Logistics Report." According to the report, logistics costs as a percentage of U.S. gross domestic product (GDP), inventory levels, freight rates, revenue growth, and shipment volumes for truck, rail, ocean, and air are flat or down, while capacity, inventory carrying costs, and volumes for parcel and express are up. Some shippers are becoming or buying carriers and 3PLs, the lines between logistics service providers and technology vendors are blurrier than ever, and consumers increasingly are determining what gets shipped when, where, and how. Small wonder, then, that the title of this year's report is "Logistics in Transition: New Drivers at the Wheel."

Some of that change was expected, and some was unforeseen. Some observers, perhaps, were lulled by last year's rosy report, which documented strong growth in freight volumes and predicted more of the same in 2015. But macroeconomic factors and an increasingly consumer-centric business environment have put the brakes on some of the trends that had been building since the end of the Great Recession.

Article Figures
[Figure 1] U.S. business logistics costs
[Figure 1] U.S. business logistics costs Enlarge this image
[Figure 2] U.S. business logistics costs as a share of nominal GDP
[Figure 2] U.S. business logistics costs as a share of nominal GDP Enlarge this image

The annual "State of Logistics Report," produced by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics, provides an overview of the logistics industry's key trends and the total U.S. logistics costs for the previous year. The research also reviews macroeconomic trends affecting logistics costs and offers a wealth of historical and forecast data.

This is the first year the "State of Logistics Report" was written by the global management consulting firm A.T. Kearney, with input from economists, analysts, carriers, and other industry experts. The new report also incorporated a number of new data sources and changed the way certain information was classified and calculated. For example, motor carriers are now separated by business segment (truckload, less-than-truckload, and private/dedicated carriers), rather than being classified as "intercity" and "intracity," as was done in the past. The research also looks at parcel separately for the first time and includes both air cargo and air express, among other changes.

The big picture
A review of the report's major findings tells a tale of transition and an economy moving at a slower pace. All told, it cost $1.4 trillion to maintain the U.S. business logistics system in 2015. (All figures are in U.S. dollars.) That equated to 7.85 percent of last year's gross domestic product of nearly $18 trillion. Logistics costs rose 2.6 percent year-over-year, a decline from the 4.6 percent compounded annual growth rate (CAGR) seen from 2010 to 2014. The gains during that period were mostly fueled by 5.5 percent annualized growth in transport costs, the largest single component of U.S. business logistics costs. However, transport costs in 2015 rose just 1.3 percent year-over-year, as declining fuel surcharges triggered by the rapid drop in oil prices depressed carrier revenue in most modes and overcapacity pushed down rates in some transport modes. (See Figure 1 for details.)

In addition to transportation costs, total U.S. business logistics costs include inventory carrying costs, comprising financial, storage, and "other"; "carriers' support activities," which includes a much broader range of services than the "shipper-related costs" in past years' reports; and "shippers' administrative costs," which reflect wages and benefits for logistics-related occupations in manufacturing, retail, and wholesale industries as well as the cost of logistics-related information technology (essentially, the annual spend on supply chain management software in the United States).

Logistics costs as a percentage of GDP, historically one of the report's most often-quoted data points, was just six basis points below last year's number, indicating that the system was operating in only a marginally more efficient manner than the year before, according to the report. (See Figure 2.) In the early 1980s, long before the impact of transport deregulation was fully felt, logistics costs accounted for about 15 percent of GDP. The dramatic increase in transportation and logistics efficiency during the last 35 years has been an overlooked factor in the success of the U.S. economy during much of that period.

Transportation: Some up, some down
Transport revenue by mode diverged considerably in 2015, according to the report. Truckload revenue rose just 3 percent as overcapacity drove down rates. Rates started the year off weak and headed downward as the year wore on; for example, the report cites a 15 percent year-on-year decline in spot rates between the first week of January 2015 and the same period in 2016. In response, carriers increased operational efficiency and cut back on equipment orders. The report cautions, however, that energy markets could correct, overcapacity could level off, and other constraints, such as the ongoing driver shortage, could cause rates to head upward in the "not too distant future."

During the panel discussion that followed the report's release at a press conference in June, Marc Althen, president of Penske Logistics, predicted that overcapacity in the trucking segment would not diminish significantly until "at least the first quarter, and more likely the second half of 2017." In his estimation, there are about 80,000 excess tractors on the road in the United States and Canada today, he said.

Truck brokerage services and dedicated fleets are thriving in the current environment, the report said. The report notes that C.H. Robinson executives reported that they received twice as many requests for proposal (RFP) in the first quarter of 2016 as they typically would see. Other winners included less-than-truckload (LTL) and parcel and express. LTL and parcel revenues rose 8 and 7 percent, respectively, as both modes benefited from increased demand for e-commerce-related transactions. LTL rates were generally stable, the report said, and although some big carriers reported declining shipments and revenue, others—particularly those with a heavy presence in e-commerce and retail—saw stable or slight growth.

Business-to-consumer (B2C) e-commerce shipments boosted demand in the ground parcel market in 2015. Two of the biggest players, FedEx and UPS, reported revenue jumps of 9 percent and 3 percent, respectively, for ground parcel service last year. The trend has also been a boon for the U.S. Postal Service, which saw a 14 percent increase in package volume in 2015. However, e-commerce shipments typically generate less revenue and come with higher handling costs, leading carriers to invest in more technology and acquire specialized service providers in a bid to reduce costs and broaden their e-commerce-related service offerings.

At the same time, carriers and third-party logistics providers (3PLs) could potentially be confronted with new and unexpected competitors: their own customers. Amazon's foray into air and ground transportation fits the "logistics in transition" narrative. While many find it disconcerting, the increased competition could have a silver lining, said Ronald M. Marotta, vice president—international division, Yusen Logistics, during the panel discussion. "Quite frankly, Amazon [getting into transportation] is going to push all of us on the service side to move faster, deliver more reliably and more quickly, and serve customers the way they want us to serve them," he said.

Revenues declined in energy-sensitive modes like rail and pipeline. Rail carload revenues, hurt by a sharp drop in demand for coal, fell 12 percent, while pipeline revenues, hampered by lower crude oil prices, fell 11.8 percent, according to the report. Intermodal revenue, the star performer for many years, rose just 2 percent, although volume was flat, as falling truck rates made over-the-road transportation more attractive to some shippers.

Brian Hancock, executive vice president and chief marketing officer of the Kansas City Southern Railway Company, thinks the railroads' intermodal volumes will bounce back. "Fuel prices are cyclical, and it's inevitable that when fuel prices go down, the number of motor carriers increases. Then they cut prices, and when the price of fuel rises, they go out of business," he said at the press conference. "We feel we compete very well against truck, but we won't chase the lowest prices."

Both airfreight and water revenues (the latter includes import, export, and domestic waterborne traffic) increased 2.1 percent. Overcapacity plagues both modes. A shift to widebody aircraft by both cargo and passenger carriers has sent rates plunging. Meanwhile, international containerized shipping is battling record-low eastbound trans-Pacific rates, even as volumes increase modestly. Carriers continue to add capacity at a faster clip than volumes. Several mergers among large carriers and the realignment of vessel-sharing agreements may help to keep things under control.

The divergence in modal revenue is a harbinger of long-term change, according to the report's authors. A profound change in buying habits has now put American consumers "at the wheel" when it comes to influencing U.S. transport costs, rather than traditional industrial standbys like energy. This shift may be permanent, the authors said.

The report also looked at market conditions for international freight forwarding and third-party logistics services. Both play critical roles in freight flows: A.T. Kearney estimates that international forwarders contract for about 90 percent of air cargo capacity and 50 percent of ocean cargo capacity worldwide. On the domestic side, the report cited an Armstrong & Associates estimate that 3PLs handled about 11 percent of U.S. logistics spend in 2015. The outlook for both sectors is healthy—international forwarding is expected to grow about 6 percent annually through 2018, and the domestic 3PL market is forecast to continue its roughly 7 percent annual growth during the same period. But a growing need for increasingly sophisticated supply chain technology in an ever more-competitive market could determine who will thrive and who will fade away.

Inventory: Costs on the rise
The tailwind of low inventory carrying costs that U.S. businesses have enjoyed in recent years came to an end in 2015, and carrying costs are likely to prove a tougher challenge should the cost of money increase. According to the report, inventory carrying costs in 2015 rose 5.1 percent over the year-earlier period, paced by a 7.4 percent increase in the inventory's "financial cost." The financial cost was derived by multiplying the value of a company's business inventory by the average cost of capital it has borrowed to finance the inventory.

Storage costs, which were included in the total inventory calculation, rose 2.5 percent year-over-year, according to the report. The cost of what the report classifies as "other" factors, including inventory obsolescence, insurance, shrinkage, and handling, rose 5.1 percent year-over-year.

Following the U.S. Federal Reserve's moves to cut its benchmark federal funds rate (an overnight interbank lending rate) amid the 2007-08 financial crisis and subsequent recession, inventory carrying costs have remained at historic lows. From 2010 to 2014, capital costs grew by just 0.9 percent, compounded annually, the report concluded. By contrast, storage costs rose 4.7 percent a year, compounded annually.

In December, the Fed raised the benchmark rate from between near zero and 0.25 percent to between 0.25 and 0.50 percent, its first increase in nearly 10 years. The central bank said at the time it was considering several rate increases during 2016, but subpar economic growth in the United States and abroad since then has led policymakers to rethink that position.

From 2010 to 2014, a period generally associated with U.S. economic growth, inventories rose 5 percent a year as businesses restocked in the hope of increased demand, and mega-fulfillment centers were erected to accommodate what would become a multiyear surge in e-commerce traffic. Though inventory levels flattened in 2015—rising just 0.25 percent—the cost of capital did not, the report concluded.

Businesses today have costlier inventory loads to finance than at any time in years. In 2009, inventory value stood at $1.93 trillion. At the end of 2015, it stood at $2.51 trillion, according to the report's data.

The nation's inventory-to-sales ratio, which in the retail trade measures the value of inventories relative to final sales, has been climbing steadily for years, resulting in a protracted inventory bloat. Despite concerns over rising inventory levels and higher borrowing costs, the report's authors do not forecast a general recession. Rather, they say the current trends—notably, the dramatic slowdown in inventory growth last year—represent an "inventory correction."

Rick Gabrielson, vice president of transportation for Lowe's, said during the panel discussion that he expects the growth of e-commerce and omnichannel commerce to impact inventory deployment. He predicted more aggregation of inventory in fewer locations, and that companies will rely more on mechanization and technology to allow faster response and delivery. "I don't think e-commerce requires or necessarily leads to more inventory," he said. "It's about where to play it." However, some markets, he added, will still need more warehouses to meet service requirements.

Prepare for disruption
The U.S. logistics system today is "sound," the report said. Services generally are available when and how they are needed, and pricing is favorable to shippers. But, the authors warned, inadequate infrastructure and the accelerating demand for last-minute home delivery will tax a system that was not designed for e-commerce. The report also forecasts that disruptive technologies, such as the Internet of Things, analytics, robotics, and 3D printing, together with operational constraints like regulations, driver shortages, and infrastructure bottlenecks, will bring about a new era in logistics.

Four "disruptive forces" will shape future costs and performance of the U.S. logistics system, the report concludes. They include:

  • Technology adoption that will create efficiencies in connectivity, labor, and assets
  • Operational constraints that will influence the scope, scale, reach, and ability to perform transportation and logistics activities
  • Macroeconomic trends that will dictate new trade and freight flows
  • Consumer requirements that will stretch carriers' and 3PLs' capabilities

All of these forces have been talked about for some time. But as they mature and become widespread, they will converge with each other. Overlay them on the e-commerce trend that puts consumers "at the wheel," and it's clear that a very different and challenging era lies ahead for logistics.

Mark Solomon is executive editor—news at DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly. Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Editor at CSCMP's Supply Chain Quarterly. and Senior Editor of SCQ's sister publication, DC VELOCITY. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

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