The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney and Penske Logistics, published the 28th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions and some takeaways relative to the report reporting on 2016 logistics industry activity.
The latest report headline reflects a U.S. and North America logistics industry “buffeted by crosswinds as the pace of change accelerates” as the authors term: “Accelerating into Uncertainty.” That contrasts with last year’s report theme- An Industry in Transition. Looking ahead, the report indicates that 2017 could be a pivotal year for the industry with the ongoing impacts of online altering industry economics, large-scale shifts in distribution flows and various other uncertainties pointing to “anything is possible.”
That stated, the report indicates that U.S. logistics costs were somewhat down in 2016, to a value of 7.5 percent of GDP, compared to 7.8 percent reported for 2015. The was the first drop reported since 2009, but we should note that there has been a revision of how the data is compiled. The authors have included a redo of numbers previously reported from the last ten years with the revised calculation with the result being roughly a half-a-percentage point on average adjustment in the numbers.
In the important area of transportation costs, which represents the largest component of overall logistics cost calculation, that category fell by 0.7 percent in absolute. At the surface, that would be good news, with water, rail, full and LTL truckload costs all declining. Of course, it is important to keep in-mind the lower costs of diesel, LNG and other fuels that occurred last year, and continue at historically low rates.
One concerning aspect however was parcel transportation which was reported as a 10 percent increase in 2016, reflecting a five-year compounded annual growth rate of 6.4 percent, which far exceeds GDP growth. Parcel obviously relates to the ongoing explosive growth of online and Omni-channel commerce. Indications are very likely that this transportation area will continue to rise with the recent announcement from UPS on higher holiday parcel surge rates.
Another obviously important area is the category of inventory carrying costs, which were reported as declining by an overall 3.2 percent in 2016. Two important cost components are the financial costs (weighted average cost of capital multiplied by total business inventories) and overall warehouse and storage costs. Both categories are subject to increases this year, possibly significant.
As we noted last year, the average cost of capital has been influenced by the unprecedented low average cost of capital and consequent interest rates these past few years. With the U.S. Federal Reserve now gradually hiking interest rates, the financial costs of inventory are likely to rise. The second, and by our lens, far more concerning component is the cost of warehouse and storage space. With the certain reality of increasingly retail sales stemming from online commerce, a structural cost burden shifts from the cost of operating physical stores, to an era that requires ever more expensive pick, pack, and parcel transportation costs. A recent CNBC Business Network report reflects the reality that the U.S. has too many shopping malls and not near enough warehouse space. The investment firm Jeffries reports that Amazon’s needs for warehouse space has been growing at a 35 percent CAGR rate, and that is just one online retailer. Accordingly, Jeffries opines that if Internet retailers were to double their online sales, it would create the need for 600 million square feet of incremental warehouse space needs. With warehouse leasing or outfitting rates already reflecting double-digit cost growth increases, it is likely that the U.S. will experience certain increases in warehouse costs. We can well envision vacant shopping malls being converted to online distribution and fulfillment centers. Factor Amazon’s announced acquisition of Whole Foods, and the likelihood of physical grocery stores having annexed online customer fulfillment to assure one-hour or same-day delivery is very real.
A third area to comment on is the category of Other Costs (Carrier support and other administrative), which was reported down by 2 percent. Here again, there is the question of whether transportation providers and logistics services providers are investing adequately in new technologies to support industry supply chain needs for increased supply chain wide visibility and digitization of customer support processes. Last week, the Business Performance Innovation Network, a peer-driven thought leadership and professional networking organization, released a study indicating that the global maritime shipping industry still needs better data sharing, and that most respondents cite improved supply chain visibility as a requirement. This report indicates that:
“industry resistance to change, coupled with the industry’s aging and inflexible IT systems, are key impediments to improving visibility and collaboration. Some 54 percent of respondents said the industry being “slow to change” was one the biggest roadblocks to improving collaboration, while 49 percent cited the cost and complexity of legacy systems.”
We view the above as an indication that while the logistics industry has performed in keeping a lid on support costs, customers and shippers are growing restless in the reluctance to change and invest among various stakeholders. This has implications for pending change.
The report authors point to four potential scenarios for logistics in the coming years;
“Stemming the tide”
By our lens, the latter three are all pertinent. Business-as-usual or plain sailing, from a customer and industry disruption perspective, does not appear to be a reality given the faster-pace of continuing multi-industry changes.
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 perspectives related to U.S. logistics.
Our takeaway for readers is once again, is similar. A current high level of economic uncertainties coupled with ongoing logistics industry challenges imply that last year’s optimistic viewpoints may not necessarily apply to a rapidly changing global and U.S. logistics landscape.
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