The Council of Supply Chain Management Professionals (CSCMP) unveiled the 29th Annual State of U.S. Logistics report this week. The findings should be no surprise at-all, to multi-industry supply chain management teams.
What businesses and teams do need to focus on are the implications moving forward, and that business as usual is no longer an option.
The authors, A.T Kearney, themed last year’s report: “Accelerating into Uncertainty.”. This year’s theme was appropriately termed: “Steep Grade Ahead.”
Highlights of the latest annual report include the following:
U.S. business logistics costs were noted as nearly $1.5 trillion representing 7.7 percent of Nominal GDP. This 2017 number compares to a $1.4 trillion, or 7.5 percent of Nominal GDP reported for 2016. The $100 billion increase is significant and is being felt by many businesses. Last year’s report further included a revision of how the data was compiled. The authors included a redo of numbers previously reported from the last ten years with the revised calculation being roughly a half-a-percentage point on average adjustment in the numbers. Regardless, as The Wall Street Journal has noted, businesses have spent an additional $250 billion on logistics and transportation needs since 2008.
According to the authors, fueling the current increased logistics costs are a robust U.S. economy, low unemployment, resurgent consumer spending and anticipated benefits from corporate tax cuts. The report further notes that such forces show no signs of easing in 2018, and fears of a trade war coupled with tariffs cloud the outlook.
As was last year, transportation costs have led to rising business logistics costs with a reported 7 percent overall increase. These same costs increased 10 percent in 2016, thus businesses have experienced a double-digit increase in transportation costs in two years, with prospects for more increases this year. Obviously, that is not a healthy nor sustainable trend. Increased costs are either passed along in higher end-product pricing or must be offset by other cost decreases.
The authors specifically call out the motor freight sector where severe capacity constraints sparked sharp rate increases. Clearly stated is that surface trucking carriers now have pricing power with prospects for added mergers and acquisitions being ripe in order to continue such market leverage.
The continued growth of E-commerce reflected in parcel and express delivery costs reportedly increased 7 percent in 2017 to $99 billion. This same category of parcel transportation grew 10 percent in 2016, also reflecting double-digit price increases over the past two years, with further increases likely. Parcel carriers such as FedEx, UPS and others continue to increase rates and surcharges again in 2018, in order to fund necessary network investments as well as please stockholders demanding more returns from the e-commerce boom.
Strong demand for products, higher interest rates and continued inflated prices in logistics and warehouse focused real estate also lifted the cost of carrying inventory. The authors point to a 5 percent increase in inventory financing, a 4.2 percent increase in storage expenditures, and a 6-basis point increase in average capital costs.
Once again, Supply Chain Matters applauds CSCMP and A.T. Kearney for their increasing efforts in making the Annual State of Logistics Report more meaningful in presenting a balance for both logistics industry and customer business perspectives related to U.S. logistics and their implications for the economy.
Our Supply Chain Matters commentaries for the past three years have reflected on a U.S. and global logistics landscape that was anchored in “business as usual” thinking and reflected in means and methods to achieve scale in pricing power and operating efficiencies, while for the most part, postponing needed advanced technology investments to harness modern logistics concepts. The industry had traditionally had a reliance on FAX, emails, and telephone communications to exchange information with the obvious default information collection tool being spreadsheets. All of this is changing rather rapidly, but not rapidly enough.
While E-commerce and smarter logistics call for smaller, but far more agile customer responsive transportation and logistics, the industry has moved in opposite directions.
Ocean container shipping lines elected to invest large sums in new mega-ships capable of transporting significantly more containers in a single vessel, to seek a competitive cost and efficiency advantage. The problem was that multiple carriers did the same, and an industry with prior over-capacity, became even more weighted in excess shipping capacity. Carrier alliances were formed, shipping schedules were consolidated, while transit times remained slower, all to garner pricing power and added margins. The bigger ships require ports to have augmented facilities, infrastructure, and automation to unload and load such ships. It is only now that shipping lines are starting to wake-up to the need for investing in more customer-focused process technologies such as end-to-end container visibility, electronic documentation, process control and new blockchain process efficiency pilots.
U.S. railroads have the most to gain from the current explosion in surface trucking costs through leveraging their intermodal services. Yet these same railroads raised their intermodal rates, while rolling out so-termed “precision railroading” principles. The latest Cass and Broughton pricing report indicates that intermodal pricing rose 9.1 percent in May on the heels of a 6.6 percent increase in April. A recent published report from Dow Jones indicates that U.S. railroads are now operating larger freight trains, some as much as a reported 3 miles in length, with 200 cars or more. The reasons cited are achieving larger economies of scale to save on fuel and labor. The other reported reason is to appease activist investors. The result is congested rail yards and added choke points, not to mention shortages of railcars now tied-up in larger trains. Similar concept, defeating the need for faster and smarter logistics.
U.S. trucking firms point to the ELD mandate to enforce driver hours of service logging as one of the reasons for today’s capacity crisis, blaming driver resignations as a result of the mandate. Yet, from our lens, the industry continued to block any sense of a phased implementation. Instead of embracing electronic logging as an opportunity to leverage added information, it was viewed as a threat to efficiency and pricing power, not to mention hiding actual hours driven in a given period. Drivers whose compensation is based on a per-mile driven basis are naturally going to be resistant to electronic logging.
Three years ago, we predicted an industry ripe for disruption.
Today, Amazon is a new modern logistics and last-mile transportation carrier that can leverage its services among hosted Fulfilled by Amazon retailers. New trucking, logistics and transportation management start-ups now embracing advanced technology are making their presence, especially in needs to serve online commerce needs. Tesla, and Nikola were the first to introduce autonomous electrical or hydrogen powered trucks, laden with multiple technology uses. Alibaba and JD.com in China are investing billions in new, advanced global logistics capabilities, designed to embrace dynamic customer fulfillment networks and larger individual shipment volumes.
Even in the most traditional food and grocery retailing sector, Amazon -Whole Foods, Kroger-Ocado, and Walmart – Jet.com will continue to disrupt food and grocery distribution, logistics and customer fulfillment capabilities. The rest of the industry is already carefully watchful.
This latest State of U.S. Logistics report points to five trends to shape the future of logistics. One is that:
“A fully digital, connected, and flexible supply chain optimized for e-commerce and last-mile, same-day delivery will become essential.”
For supply chain and business leaders, we need to fully endorse the above statement as a given. We hasten to add that businesses need to determine which carriers, logistics services and transportation providers are best equipped to support such needs in the timeliest manner, and with a compelling customer value proposition. The answer could be different that what exists in today’s industry landscape, in certain cases, dramatically different.
In short, businesses and their respective supply chain teams will need to rethink existing strategies for logistics. Rather than focused as a cost center that must be optimized, logistics and transportation must now be viewed as an extension of the business strategy related to customer fulfillment needs, and all that that requires. Costs will always remain a concern, but enhanced capability delivered at a competitive cost, supporting a flexible supply chain are the new table stakes.
Yes- Steep Grade Ahead is the appropriate descriptor of the 2017 state of U.S. logistics. In less than three years, the dawn of the new decade, we anticipate the state descriptor to be: Industry Disrupted.
Logistics industry business as usual is no longer an option.
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