Logistics costs for businesses in the United States grew in 2015, while spending actually slowed by nearly half from the 5.1 percent compound average rate over the previous four years and was flat relative to the overall economy.
Logistics costs for U.S. businesses grew 2.6 percent to $1.4 trillion in 2015, but spending actually slowed by almost half from the 5.1 percent compound average rate over the previous four years and was flat relative to the overall economy, according to a new and improved State of Logistics Report from the Council of Supply Chain Management Professionals (CSCMP).
As a percentage of Gross Domestic Product, logistics costs remained static at about 7.9 percent, and they have stayed within a narrow range between 7.5 percent and 8 percent since 2010, after dropping in 2009 because of the recession.
The authors of the report’s 27th edition project that freight distribution costs will rise moderately in 2017 due to expectations for a slight improvement in economic growth, a tightening of transportation capacity, driver shortages, inventory changes and possible interest rate increases.
CSCMP this year selected consulting firm A.T. Kearney to write the report, previously produced by Rosalyn Wilson, to bring a fresh look to the study. The A.T. Kearney team, led by Sean Monahan, reorganized the report’s structure and expanded or replaced sources of data to enable more precise analysis of logistics activity in the United States.
The dramatic lowering of double-digit logistics costs compared to the size of the economy over the past quarter century is largely a function of industry progress in making supply chain management and freight transportation more efficient, but the steady state of spending in 2015 also reflected changes in the U.S. energy sector, a boom in e-commerce and lower inventory holding, the authors said.
The biggest component of logistics costs—transportation—only grew 1.3 percent in 2015.
Trucking, the largest transportation sector, increased 2.6 percent to $583 billion in revenue, compared to 5.9 percent average growth in the prior five-year period. Truckload, which represents nearly half of the market, experienced a dramatic reduction in rates due to severe overcapacity. Shippers are taking advantage of the fact that small carriers are chasing freight at low prices in an effort to stay in business. Penske Logistics, which sponsored the report, estimates there are 80,000 excess tractors operating beyond needed demand in the United States and Canada, President Marc Althen said during a panel discussion in Washington, D.C., coinciding with the report’s June 24 release.
Spot rates, according to one analysis cited in the report, fell about 18 percent between the first quarters of 2015 and 2016. Contract rates mostly held up and truckload carriers were able to maintain volumes and yield if they had minimal exposure to the sport market, according to analysts.
Truck tonnage was flat due in part to improved intermodal service, a strong dollar that depressed exports and higher inventory levels. Carriers responded by ordering 24 percent fewer new trucks in an effort to align capacity with demand.
The less-than-truckload and parcel sectors, however, grew 7 percent and 8 percent, respectively, on the strength of growing e-commerce sales.
Motor carriers, despite raising wages over the past five years, are experiencing more difficulty finding and retaining drivers in the face of lower national unemployment and labor competition from construction and other industries, stricter truck safety regulations such as hair-follicle drug testing, and less interest among younger people in a trucking career.
Penske is actively pursuing drivers from companies that go out of business and recruiting military veterans, Althen said. The company, which employs about 4,000 drivers, has a turnover rate of about 27 percent, which is low by industry standards.
There are more drivers to select from in the past 18 months as workers get laid off in the domestic oil patch. Penske currently has openings for about 150 drivers compared to about 1,000 drivers a year ago, Althen said.
Many shippers realize that driver capacity is the primary threat to timely freight haulage and are trying to make it easier for truckers to get in and out of their facilities, and treat drivers with more respect. Easy steps shippers can take include having amenities, such as restrooms, available for drivers and drop-and-hook operations rather than live loading. More carriers, in turn, are prioritizing which shipper accounts to serve based on whether they are freight-driver friendly.
Rick Gabrielson, vice president of transportation at Lowe’s, said he is aware of two motor carriers that have created an app for drivers to rate customers, which puts pressure on shippers to act collaboratively because poor ratings may cause drivers to decline servicing them.
“If you’re not taking care of the drivers when they arrive at your facility, you may not get them to take the next load. And that is causing shippers to really look at their processes,” he said.
Freight railroads experienced a 2.5 percent reduction in overall cargo volumes, driven by a 14 percent drop in coal carloads as utilities accelerated the use of natural gas for market reasons—gas is now abundant and cheaper due to advances in hydraulic fracking—and to meet stricter Obama administration emissions regulations on coal-fired power plants. The slump in global oil prices also led to a decline in oil-by-rail shipments from new shale oil fields and a drop in pipeline revenues. Meanwhile, the intermodal business—the leading growth center for railroads in recent years—stalled in 2015. Some marketshare presumably was lost to trucking given lower fuel costs and base rates in that sector.
As truck rates and fuel prices firm up, intermodal volumes should rebound in the coming year, according to Monahan.
Meanwhile, the plunge in oil prices to below $50 a barrel earlier this year has resulted in lower fuel costs for transportation providers. In addition, lower oil prices reduced the need for carriers to impose fuel surcharges, which often built in an extra margin for efficient carriers, according to the report. Oil and fuel prices have partially rebounded in 2016, which could erode shippers’ savings in the second half of the year.
Trucking, ocean and air cargo carriers share the same dilemma—overcapacity and a low rate environment. Airlines continued to add cargo capacity at a time of weak freight demand, leading to anemic load factors of 42 percent globally. The container-shipping industry increased its slot capacity by 8.5 percent, but rates cratered to historic lows in the midst of weak global economic growth.
Gabrielson said international ocean shipping rates are at levels he’s never seen in decades and can’t recall the last time a domestic transportation provider actually cold-called shippers looking for additional freight.
Inventory levels also flattened (0.2 percent increase) after steadily rising about 5 percent per year between 2009 and 2014, but total inventory carrying costs jumped 5.1 percent because of a rise in weighted average cost of capital (0.42 percent). The correction realigned the inventory-to-GDP ratio closer to historic levels. A contributing factor for the increase in holding costs was higher interest rates.
During the last few years “inventory was cheap, cash was cheap,” Monahan told reporters. “As transportation costs rose, companies made a tradeoff to store goods. However, with the cost of capital rising, and transportation relatively cheap, we’re seeing prudent business organizations are willing to reduce inventories and spend more on transportation to make the most effective logistics cost trade-off.”
High inventories restricted the ability of some retail customers to efficiently process freight in their distribution centers, forcing them to put some seasonal products in storage until the following season, Ronald Marotta, vice president of international for Yusen Logistics, said.
Long-term inventory levels relative to GDP are about 3.65 percent, but even as national productivity increases inventory should remain in this efficient range, Monahan said.
“Our clients have an increased focus on their cost of capital, whether it be financing or storage costs. They are employing lean manufacturing principles more, producing small batch sizes and using more sophisticated techniques. Whereas before they’d focus on days of supply, now they are using safety stock, point-of-sale information and so on to become much more streamlined in deploying inventory,” Monahan said. “Hopefully, as organizations become less siloed and more cross-functional in their decision-making, where manufacturing and sales have accountability for inventory too, that we’ll see inventories become a lot more manageable.”
Some grocery store chains are taking inventory out by directly dealing with suppliers to bring fresh food, such as pre-made sandwiches, into their stores rather than routing it through a distribution center.
“There’s a big trend for us to pick up directly from suppliers and bring it directly to stores,” Penske’s Althen said.
The growth of e-commerce is transforming logistics, with demand high for ground services, last-mile deliveries and returns capabilities. Online and mobile sales in the United States grew 14.6 percent last year and e-commerce now represents more than 7 percent of retail sales. The trend means parcel will play an increasingly important role in retailers’ logistics operations. UPS predicts e-commerce will double by 2020 and that business-to-consumer parcel volumes will exceed 50 percent of total parcel shipments.
The catch is that business-to-consumer shipping is fairly expensive. It doesn’t have the same density within a truck as palletized freight, and the average shipment revenue is lower and costs are higher for residential deliveries, according to the State of Logistics Report and other analysts. Non-traditional players are moving into the space trying to use Uber-like technology and other IT to increase efficiency.
Many retailers are trying to compete with e-commerce behemoth Amazon by also offering same-day delivery, often shipping from local stores rather than regional DCs—at the expense of FedEx and UPS. Customer expectations for last-minute delivery and flexible return policies are putting pressure on retailers and making fulfillment a loss-leader in many cases.
Monahan said retailers in the coming years will probably adopt more rational pricing strategies on free package delivery. One solution, according to analysts, is to offer shoppers a menu of delivery options that allows them to pay a premium if they want their order fast.
Many retailers are responding by locating warehouses closer to consumers—even in urban areas—so they fulfill orders quickly and reduce transportation costs. Others, such as home improvement stores, are taking a differentiated approach with bulk items like appliances flowing through special, regional distribution centers where inventory can be aggregated to respond faster to the majority of customers, Gabrielson said. Distribution strategies will differ by circumstances, with companies likely to respond quicker to orders in urban versus rural areas, he added.
The U.S. 3PL industry continues to grow faster than overall logistics spending, with revenues projected to hit $170 billion in 2016—up 6.8 percent since 2009—according to consultancy Armstrong & Associates. Still, there is plenty of room for growth since only about 11 percent of U.S. logistics spend is outsourced.
Sophisticated 3PLs are investing in cloud-based technology to better automate load matching, load tendering and route optimization, and give shippers real-time shipment visibility. Large shippers increasingly are hiring lead logistics providers to orchestrate their inbound supply chains through the use of so-called “control towers,” which essentially involve outsourcing management of transportation networks to a 3PL to act as a single coordination point across supply chain partners, enabled by a transportation management system.
Other technology trends are poised to disrupt traditional ways of conducting logistics activity, the report noted. Extensive research and development is underway on driverless trucks and platooning them in tight sequence to gain efficiency, apps that match available trucks or car drivers with loads or packages are sprouting up, and 3-D printing could change shipping requirements over time.
The “uberization” of trucking is beneficial for reducing empty backhauls and poses a big threat to companies that specialize in truck brokerage, Althen said.
Based on its new methodology, A.T. Kearney has recalculated business logistics costs for the past 10 years. The firm’s estimates are about four-tenths of a point less per year than Wilson’s were, although the trend is the same. A.T. Kearney estimated business logistics costs as 7. 9 percent in 2014 compared to Wilson’s figure of 8.3 percent.
The new report, for example, includes natural gas in the pipeline category for the first time, takes pains to accurately represent freight forwarding costs based on net revenues to avoid double-counting pass-through of purchased transportation costs, and breaks out the cost of inventory into various sub-categories to calculate the weighted cost of capital.
Wilson relied on the Federal Reserve’s cost of paper and estimated inventory carrying costs by multiplying the total value of business inventories by a fixed percentage, from which the subcomponents, such as financial and obsolescence costs, were estimated afterward.
The new authors also adjusted the trucking categories from intercity and inner-city to the actual modes: full truckload, less-than-truckload and parcel. The parcel sector is included in the report for the first time.
The AT Kearney team said the U.S. logistics system will increasingly encounter headwinds in the form of infrastructure deficiencies and consumer expectations for rapid online deliveries when last-mile capabilities are still limited.
(Penske Logistics’ fleet size was corrected from the earlier version)
Eric Kulisch is Trade and Transportation Editor of American Shipper. He can be reached by email at ekulisch@shippers.com.