For more than 30 years, the headline number from the Council of Supply Chain Management Professionals’ (CSCMP) “State of Logistics” report, the latest version of which was released Thursday, has been the ratio of business logistics costs to U.S. GDP. The lower the ratio, the more efficient the country’s logistics system because the cost of moving goods consumes a smaller slice of the total economic pie. Or so the argument has gone ever since the report’s inception.
The events of 2020, however, may forever change the core narrative. The rise of e-commerce, which reached a crescendo in the pandemic-crossed year, has expanded the scope of logistics functions to the home, a destination that the report, with its historical focus on business-to-business (B2B) logistics, hasn’t focused on for much of its 32 years. Activities once considered “domestic” in nature — grocery shopping or trips to the department store, for example — have become commercialized, never more so than during 2020.
As the COVID-19 pandemic redraws the landscape in ways that are nowhere near fully vetted, there has been a profound change in the view of the logistics industry’s connection to the broader U.S. economy. This will manifest in bigger budgets for logistics in the years ahead, if the report’s numbers and analysis are accurate. Increased spending on logistics services, once frowned upon as a sign of inefficiency, is now being perceived as part of a “commendable expansion,” said executives at consulting firm Kearney who drafted the report. (Third-party logistics firm Penske Logistics sponsored the report.)
Shippers will likely boost their logistics spend to build resilience in the wake of the pandemic’s chaotic effect on supply chains, the report said. They may absorb higher inventory carrying costs in return for holding more safety stock in warehouses. They may pay higher lease or rental rates to forward position their stock in high-cost urban fulfillment centers so they can be near their end customers, the authors wrote. They may increase their technology investments not to replace labor but to offer a broader range of customer services or to reduce their carbon footprint.
These investments come with significant price tags. However, the authors stressed that they underscore the “importance of logistics to both economic activity and Americans’ general quality of life.” The key challenge for logisticians, according to the report, is to broaden their scope of activities in the most efficient manner possible.
That said, the authors found it “remarkable” that the ratio of business logistics costs to GDP actually fell in 2020 despite the expenses that shippers incurred in repositioning their supply chains away from the steady state manner they are accustomed to operating. The 2020 ratio came in at 7.4%, down from 7.7% in 2019. Total logistics costs shrank by 4% year-over-year to $1.56 trillion as much of the economy ground to a halt during the spring and early summer. GDP dropped 3.5% to $20.94 trillion. Yet costs skyrocketed for many shippers in the second half of the year as end demand increased but the means of getting goods to market spun off its axis.
Parcel and last-mile costs rose 24.3% as e-commerce and home delivery demand surged. Airfreight costs rose by 9% as lower-hold capacity on international passenger flights — which move about half of worldwide air freight shipments — disappeared. Still, transportation costs rose by just 0.8% as demand in other modes declined sharply in the first half of the year.
Ocean freight costs dropped 28.6%, a puzzling data point given the historic surge in container rates that began in the second half of 2020 and isn’t close to abating. The authors attributed part of the drop to “one-time reclassifications” in its methodology. However, the change in classifications wasn’t explained in the report or in a press briefing held on Wednesday.
Trucking costs dropped by 0.6% due to reduced capacity during the pandemic, the report said. Rail costs fell 11% due to a 15% reduction in carload traffic. Intermodal costs fell by a lower percentage, though the report didn’t specify a number.
Inventory carrying costs declined 15% year-over-year, due mostly to a 29% drop in financial costs as interest rates fell in the wake of the pandemic.