June 20, 2017

Annual "State of Logistics Report" shows industry looking in cloudy rear-view mirror

Expenditures dropped in 2016 for first time in six years; logistics-spending-to-GDP ratio at lowest level since '09.

By Mark B. Solomon

The 28th annual "State of Logistics Report" today painted a somber picture of logistics activity during 2016, with expenditures declining for the first time since 2010 and logistics spending as a percentage of U.S. gross domestic product (GDP) dropping to its lowest level since the depths of the Great Recession.

The annual report, prepared by consultancy A.T. Kearney Inc. for the Council of Supply Chain Management Professionals (CSCMP), and presented by third-party logistics (3PL) provider Penske Logistics, found that spending last year was constrained by uneven economic growth, overcapacity across virtually all modes, and corresponding rate weakness. Total logistics expenditures—framed in the report as "costs"—fell 1.5 percent year over year, to $1.392 trillion. The decline contrasted with a 4.6-percent increase in spending, compounded annually, from 2010 to 2015, as the U.S. economy and the logistics businesses supporting it fitfully emerged from their worst downturn in more than 70 years.

Logistics costs as a percentage of GDP, traditionally viewed as the report's headline number, came in at 7.5 percent in 2016, the lowest point since 2009, when the ratio stood at 7.37 percent. The ratio moved in a very tight range between 2011 and 2015, and ended 2015 at 7.84 percent.

In years past, a ratio as low as last year's would have been viewed as positive because it underscored the supply chain's strides toward greater efficiencies. For example, the ratio was well into double-digit levels during the report's early years as transportation and logistics providers threw off the yoke of regulation in the late 1970s and early 1980s and slowly adjusted their models to manage more efficiently in a free-market environment. Indeed, the first-ever drop in the ratio below 10 percent, which occurred in the early 1990s, was a cause for celebration at the time.

Truckload expenditures, the largest line item among the cost categories, fell 1.6 percent year over year, to $269.4 billion. Rail carload expenditures, buffeted by continued weakness in coal volumes and a dramatic drop in energy exploration spending and development caused by lower oil prices, fell by 13.8 percent. Intermodal spending declined 2.5 percent. Spending on water transportation, which covers both U.S. import and export traffic, dropped 10 percent, reflecting persistent overcapacity and rate pressures on international trade lanes, according to the report.

Not surprisingly, parcel spending, supported by increases in demand for e-commerce fulfillment and delivery, jumped 10 percent, the report said. For the first time in the report's history, parcel moved ahead of rail in modal spending.

Spending on warehouse storage services rose just 1.8 percent over 2015 levels, about half the pace of its 5-year compounded annual growth rate. A sizable decline in the weighted average cost of capital drove down the financial costs of carrying inventory by 7.7 percent. A third category of inventory-carrying costs, which includes obsolescence, shrinkage, insurance, and handling, fell 3.2 percent.

The decline in transportation spending came amid a rise in energy prices off of multi-year lows. This marks the second straight year that the two trends moved in opposite directions, reinforcing the notion that energy is no longer the primary factor driving logistics spending. Rather, consumers have become the main influence, the report said.

The report's authors said the logistics industry "appears destined for a prolonged bout of cognitive dissonance" as it reconciles subpar GDP growth—first-quarter output rose a scant 1.2 percent--with rising stock market values, better consumer confidence data, and ongoing investments in information technology.

Yet the inherent uncertainty has not slowed the pace of change as newcomers challenge established players for market share and incumbents refresh their business models, the report said. In one of the report's most provocative forecasts, the authors expect more large shippers to follow the lead of Amazon.com Inc. and either establish or expand their in-house logistics operations. Seattle-based Amazon, the nation's largest e-tailer, has added aircraft and truck trailers, and is constructing an air cargo hub in Cincinnati, to support is two-day delivery service, known as "Amazon Prime."

For now, caution rules the day, reflected in declines in the closely watched inventory-to-sales ratio, which measures on-hand inventories in comparision to sales levels, the report said. The authors acknowledged that the declines could be attributed to more accurate forecasting tools that minimize the risk of over-ordering. However, a more plausible case can be made that companies unsure about future demand are holding inventory levels closer to actual retail sales figures instead of stocking up in anticipation of future growth, the authors said.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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