The annual State of Logistics Report® found a modest cost reduction while indicating that the sector is “Accelerating into uncertainty.” Lower costs were connected to overcapacity and price competition. Uncertainty is tied to macroeconomic factors because the world and global logistics has become so interconnected.
After compiling the data, doing interviews with over 20 industry leaders, and completing their analysis, the A.T. Kearny State of Logistics Report for 2017 indicates uncertainty ahead.
The 28th Annual “State of Logistics Report®”, authored by A.T. Kearney and presented by Penske Logistics, was released this summer. It has tracked and measured logistics costs in the U.S. supply chain since 1988 and has become the premier benchmark for U.S. logistics activity.
The United States continues to have a robust logistics industry that has been making steady investments in technology and is planning for even bigger changes in the future due to emerging trends in robotics, self-driving trucks, artificial intelligence and The Internet of Things (IoT), said the report.
The research suggests that these investments will be needed to improve adaptability and agility as the United States and global economy continues to change and decision makers are faced with an uncertain regulatory environment ahead.
Here are the major highlights on the data points from the report which used information from last year:
• Logistics costs decreased in 2016 by 1.5%, the first decline in logistics costs since 2009.
• Fuel costs dropped in 2016 with the average cost per gallon of diesel at $2.30 per gallon in 2016.
• Parcel has now surpassed rail and is the second largest sector of the transportation industry.
• Rail decreased by 11% and water (inland and ocean shipping) declined by 10%.
• Inventory carrying costs went down by 3.2%.
What drove the decrease in logistics costs in 2016? It wasn’t lower fuel costs; logistics costs have continued a trend of not being driven by fuel prices.
“The biggest changes that drove the impact on logistics costs last year were over-capacity and low volumes on shipments that drove pressure and competitiveness and that compressed the cost structure,” said report author Sean Monahan in an online video.
Motor Carriers Doing Better in 2016
The motor carrier market improved after a dismal 2015. A.T. Kearney analysis of Truckstop.com data shows that spot rates for dry van shipments rose by 10% in 2016. Full truckload rates also improved to end 2016 above 2015 levels. Rates remained low, below $2 per mile, which was too low to relieve the financial stress many carriers were experiencing as indicated by the fact that 14,000 trucks were removed from services last year.
The overcapacity caused carriers to struggle, but modest rate increases were managed for less-than-truckload (LTL) and dedicated contract carriage (DCC) and brokerage services, where emerging business models may promise some relief to motor carrier doldrums.
Andrew McElroy, CEO of Transfix, a logistics leader quoted in the report, said that “technology adoption isn’t keeping pace with innovation” with too many shippers still reliant on outdated EDI systems. He also said that asset utilization continues to be a problem that is closely linked to the truck driver shortage.
“Estimates peg the driver shortage at 15%, which also happens to be the percentage of miles that trucks are driven with empty trailers. That makes the problem look more like an efficiency challenge than a supply-demand mismatch. Better asset utilization and capacity management might be the answer,” he said.
Warehousing Added to the Report
For the first year warehousing was added to the report and shows that the demand for warehousing is strong and saw an increase in costs of 1.8% in 2016 compared to 2015. There is a lot of change in the warehouse and storage sector brought about by consumer ecommerce spending and parcel delivery. Parcel companies and shippers are striving to meet same day and next day service levels which means they are beginning to move more warehousing and storage facilities closer to major population centers.
The Road Ahead – Four Scenarios to Consider
The A.T. Kearney Report suggested four potential scenarios for the coming years, not predictions per se, but potential trends that could emerge.
1. Plain Sailing – In this scenario, regulatory constraints become less of a factor, global trade flourishes and technology improves efficiency.
2. Choppy Waters – This scenario would see new policies favorable to U.S. manufacturing and would force shippers and logistics companies to adapt to more domestic demand by increasing investments in cost saving technologies.
3. Stemming Tide – Tightening regulations that increase operating costs and would also accelerate investments in cost-saving technologies.
4. In the Doldrums – This is the worst case scenario that could emerge and would mean higher regulatory costs and tough economic conditions that would deter investment in technology.
The most dominant economic factors currently affecting the logistics industry are rising interest rates and a strong dollar. This means that the cost of doing business will increase and imports will be cheaper. As a result, American goods will be more expensive and export shipments will be lower, while imports will rise. Logistics companies will need to adjust their networks to accommodate more US-bound shipments and declining outbound shipments.
The State of Logistics Report from A.T. Kearny finds that despite uncertainty, and some challenges for decision makers, macro-economic trends for the U.S. and global economy are good and there will be plenty of opportunities for U.S. logistics companies to thrive.
