Last year the cost of logistics in the United States reached a ten year high, according to the State of Logistics Report. This annual assessment by the Council of Supply Chain Management Professionals (CSCMP) found that U.S. business logistics costs rose 11.4% to reach $1.64 trillion, or 8% of 2018’s $20.5 trillion gross domestic product (GDP).
So, why are supply chain costs rising? The retooling of supply chains to account for more e-commerce sales has led to the need for smaller, more costly warehouses. Last year, extremely high utilization of existing truck fleets combined with limited available freight capacity to drive up transport rates. In addition, increasing government regulations on driver hours-of-service caused smaller trucking firms to cease operations, consolidate or be acquired by larger transportation companies. All of these factors led to higher transport and logistics costs in 2018. The logistics study is written by A.T. Kearney and presented by Penske Logistics.
Also, a tight U.S. labor market and higher wages for truck drivers and warehouse workers has contributed to higher costs. One potential solution is technology that will decrease labor requirements and improve supply chain collaboration.
The report stated, “Silicon Valley has devoted time, energy and resources to automation and robotics with inventions like automated trucks and automated warehouses…The upgrade to a 5G communications network is on the horizon, which will improve logistics operation execution; planning and management; and high-security encryption.”
“The logistics industry is at a new crossroads,” said Michael Zimmerman, partner with A.T. Kearney and co-author of the 2019 report. “It has overcome a tough and exhausting year. Now, demand has softened, and growth is in doubt—but not to the point where a steep decline is visible, a context we summarize in the report’s title, ‘Cresting the Hill.’”
Across three decades, the report has offered a snapshot of the U.S. economy through the lens of the supply chain.
Derek Leathers, president and CEO of Werner Enterprises, said that despite gains last year, trucking companies are still operating on very tight margins. He explained, “The cost of capital for the average carrier is clearly north of 10%, maybe 12-13%, yet average earnings are not covering that; so, we still have work to do to find ways to take waste out.”
When it comes to truckers, the industry still complains about a driver shortage. According to the U.S. Census Bureau, the number of truckers surpassed 3.5 million in 2018 – an all-time high. American Trucking Associations Chief Economist Bob Costello said, “It’s not that the number of truck drivers has been in a constant decline. It’s just that it’s not growing enough to match up with growing demand.”
From a cost perspective, the good news is that freight activity has dropped this year in many markets. Truck tonnage volumes dropped again in May. Costello commented, “The economy is still growing, but the recent volatility in truck tonnage fits with a broader economy that is showing more mixed signals. The good news is if you ignore recent highs and lows, tonnage appears to be leveling off, albeit at a high level.”
What does this mean for pallet and lumber companies? Increasingly, logistics must be a key part of your overall business strategy. You need to optimize use of trucks and drivers. This calls for reducing empty miles and better utilization of assets. If a delivery doesn’t make money, maybe you should consider offering the customer a better deal to come pick it up themselves. There will be more use of third-party transportation and logistics companies. You can take a piece of that business.
Companies that own at least some of their trucking capacity will be a in better shape. This comes at a cost, but it also provides versatility. You will be able to get products to customers when others may not.
What is your transportation strategy? How will it change to accommodate tight delivery schedules with limited drivers? Logistics can no longer be an afterthought. It must be part of your business strategy if you want to be positioned for the future.
