Fleet Management

State of Logistics: Buffeted by Crosswinds

June 21, 2017

By David Cullen

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Photo: Penske Logistics
Photo: Penske Logistics

The latest annual State of Logistics Report paints the industry not quite as storm-tossed, but as “buffeted by crosswinds as the pace of change accelerates,” according to the study’s five authors, who are consultants with A.T. Kearney. Reflecting that reality, the report is titled “Accelerating into Uncertainty.” 

Released this week by the Council of Supply Chain Management and again presented by Penske Logistics, the 46-page report “contains the statistics and industry insights that will not only help our members do their jobs better, but also better prepare them for the business demands ahead, in a very dynamic marketplace," according to  Rick Blasgen, president and CEO of CSCMP. 

The report features a “focused narrative” on the economic environment impacting logistics; insights from interviews with industry leaders, including shippers, carriers, and analysts; a spotlight on relevant trends; and a strategic “point of view” on the state of the industry. 

"We believe readers will be interested in this year's report for the retrospective view on 2016 market dynamics," said Sean Monahan, A.T Kearney partner and report co-author. He added that the study also lays out a “forward-looking view on considerations for the coming 18 months and beyond." 

This year's report shows the first decline in United States Business Logistics Costs (USBLC) since 2009—with that coming even as the surge in e-commerce sector drove up demand for parcel delivery services.

"Even in this current uneven economy, we are seeing upticks in demand for outsourced logistics services," pointed out Althen, president of Penske Logistics president. 

Key findings of the report include:

  • U.S. economic growth will be strong in the near term
  • Rising interest rates and an appreciating U.S. dollar could increase the costs of doing business
  • Businesses appear to be cautious in adding inventory under the cloud of uncertainty
  • Fluctuations in truck tonnage demand to continue as businesses adjust their outlook over time 

A.T. Kearny said that the report found that the global economy emerged from a sluggish 2016 poised for faster growth. But while the International Monetary Fund predicted 3.5% worldwide growth in 2017, and burgeoning consumer and business confidence augured well for logistics demand across a range of sectors, GDP for the U.S. rose an “underwhelming” 1.2% in the first quarter. That was ahead of last year’s 0.8%, but only the fourth-fastest first quarter in the last six years.

“The disconnect was the latest unsettling discrepancy between soft indicators of sentiment and hard data on actual economic activity,” the firm noted.

These “conflicting signals leave shippers and logistics providers with little clarity on economic fundamentals for the remainder of 2017. Further complicating the outlook are variables such as currency exchange levels, interest rates, and political trends. Against that uncertain backdrop, executives must make vital decisions about capacity, pricing, technology deployment, and strategy.”

The study shows that along with lackluster economic growth, last year saw the first decline in U.S. Business Logistics costs since 2009. Those costs fell 1.5% in 2016 after rising at a 4.6% compound annual rate from 2010 to 2015. Costs fell across all three USBLC components: transportation, inventory, and other costs. The declines reflect overcapacity, slack volumes, and rate pressures in several sectors, even as demand and prices rose in others.

Also of note was that overall spending on logistics dropped despite a climb in energy prices. “This marks the second straight year in which the two have moved in opposite directions, indicating energy prices are no longer the primary factor in logistics costs,” said the authors. “We suggested last year that consumers have become the driving force behind logistics spending, and this year’s results confirm the powerful impact of rising consumer demand for e-commerce deliveries.”

While overall transportation costs slipped 0.7% last year, spending on package delivery services leapt 10%. That enabled parcel and express delivery to pass surpassed railroads as the second-largest logistics sector behind motor freight.

Cross-currents also affected inventory carrying costs last year. “Storage expenditures rose 1.8 percent and are now as important as the financial carrying cost of inventory,” the authors stated. “Until last year, storage costs grew at a compound annual rate of 4.7%. Nevertheless, a 54-basis-point drop in weighted average cost of capital pulled down overall inventory carrying costs by 3.17%.”

A.T. Kearny said several trends in 2016 “drove the action” across various logistics sectors:

  • Overcapacity and rate pressures fueled cost-cutting and consolidation, particularly among motor carriers and ocean freight companies.
  • Cutting-edge technologies brought new efficiencies to sectors such as warehousing, parcel delivery, and motor freight.
  • Along with technological advances came new business models in third-party logistics, freight forwarding, and rail, among others.
  • Parcel carriers and warehouses capitalized on surging e-commerce volumes to raise rates and continued reconfiguring their networks to meet consumer expectations for faster delivery.

“Looking ahead,” the authors said, “2017 could be a pivotal year for logistics. Demand patterns are shifting, technological advances are altering industry economics, and new competitors are challenging old business models.

"This year could bring significant moves that reshape individual sectors and even the industry as a whole," they added. "Major business combinations, large-scale shifts in distribution flows, deep capacity cuts, massive infrastructure investments— anything is possible.”

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