The U.S. logistics industry is in good shape, but the seismic shift in consumer spending is going to put more pressure on a system that was not designed for it.
The seismic shift, of course, is e-commerce — people making purchases online from Internet behemoth Amazon and other companies as well as traditional retailers like Walmart. Continued growth in e-commerce is spurring a corresponding increase in home delivery services, like parcel and express and less-than-truckload delivery.
Those were just a few of the findings in the annual State of Logistics Report issued by the Council of Supply Chain Management Professionals. The council held a news conference to promote the report in Washington, D.C. in June. The report is available for purchase and was not made public.
However, Sean Monahan, a partner in A.T. Kearney, the global management consulting firm that researched and produced the report, discussed it at the news conference and summarized the findings. In addition, a panel of industry experts fielded questions about the report.
Here are some quick numbers from the report, as summarized by the council and A.T. Kearney. U.S. business logistics costs were $1.4 trillion in 2015, an increase of 2.6% from the prior year. However, the rate of growth slowed in 2015; between 2010 and 2014, business logistics costs grew by an average of 4.6% annually. U.S. business logistics costs accounted for 7.85% of GDP in 2015, a slight dip.
Lower transportation costs in particular moderated the growth in logistics spending. The drop in energy prices triggered a reduction in fuel surcharges, which affected nearly all modes of freight. (Diesel prices fell nearly 30% in 2015.) Also, overcapacity in the full truckload sector helped drive down rates in that submarket.
The study suggested 2015 may have been a turning point in U.S. transportation costs. Transportation modes that rely heavily on energy customers for revenue, like rail and pipeline, experienced declines in shipments and revenue. On the other hand, consumer-driven modes, such as parcel and express and less-than-truckload, experienced accelerated growth.
Another key finding was that inventories flattened out in 2015 — increasing only 0.2% — after increasing 5% annually from 2009-14. That shift was attributed to the rising cost of capital after a nearly decade-long period of falling interest rates. Although growth of inventories stagnated, inventory carrying costs rose 5.1%.
In an interview after the panel discussion, Rick Blasgen, president and CEO of the Council of Supply Chain Management Professionals, noted with interest the slowing growth of logistics costs in recent years.
He also pointed to a number of dynamic factors, including the shift in oil prices and the acceleration of e-commerce. “I think the industry is going through a little bit of disruption,” he said, but professionals should be able to convert challenges into opportunities.
The panel discussion dwelt considerably on inventory management, he noted. “Just because interest rates are low doesn’t mean we shouldn’t focus on it. Interest rates will ultimately come back higher, and that will impact costs.”
“Managing inventory…is becoming extremely important,” he added, and so will supporting e-commerce.
In his remarks before the panel discussion, Monahan called the flattening of inventories a “step back and a re-alignment to historic levels.” When cash was cheap, companies were willing to hold more inventory. Now that cash is more expensive and transportation is cheap, they are more willing to reduce inventory and spend more in transportation. Inventory levels likely will continue to come down, he predicted.
In an interview with Yahoo Finance, Monahan pointed to four factors impacting the industry: low energy costs, excess capacity across multiple modes, the step back in inventory levels, and the continued growth of e-commerce.
E-commerce grew 14% in 2015, fueling an 8% increase in parcel and express shipments. Yet, the U.S. logistics infrastructure was built for efficiency and low cost, Monahan noted, not home delivery.
Already, though, with the increased migration to home delivery, the industry is beginning to see alternative solutions arise. Walmart and other companies are testing Uber — the company that enables consumers to use their smart phone to request a ride and then pairs them with Uber drivers who use their own vehicles — and similar businesses for home delivery.
Today, the logistics industry is sound, as A.T. Kearney reported. Desired services and features are generally available, the industry is cost efficient and is delivering pricing favorable to shippers. However, gaps in infrastructure and accelerating trends for speed will put more pressure on a system that was not designed for e-commerce-driven ‘last mile, last minute’ service and delivery.
The American Society of Civil Engineers has called for $2 trillion in spending for repairs and expanding surface transportation infrastructure. The December 2015 Fixing America’s Surface Transportation (FAST) Act provides $305 billion in funding through 2020, including $226 billion for the Federal Highway Administration.
The logistics industry will experience other significant changes over the next decade, according to the summary provided by A.T. Kearney. Those changes will include technology (like robotics and 3D printing), and operational constraints, such as regulations, driver shortages, and infrastructure bottlenecks. The companies that are positioned to adapt to these disruptions will be the ones that likely will flourish.
