![[Figure 1] U.S. Business Logistics Costs as a Percent of Nominal GDP](/media-library/20190618-logistics-costs-gdp-fig1.png?id=53612597)
In the face of tight transportation capacity and rising freight rates, overall U.S. business logistics costs jumped 11.4 percent in 2018 to a total of $1.64 trillion, or 8.0 percent of the U.S.'s $20.5 trillion gross domestic product, according to the Council of Supply Chain Management Professional's 30th annual State of Logistics Report. (See Figure 1.)
![[Figure 2] U.S. Business Logistics Costs Increased in 2018](/media-library/20190618-logistics-costs-2018-fig2.png?id=53612598)
The report, which was issued this morning at the National Press Club in Washington, D.C., is written by the global management consulting firm A.T. Kearney and sponsored by logistics service provider Penske Logistics. It found that all the components that make up U.S. business logistics costs—transportation costs, inventory carrying costs, and other administrative costs—rose in 2018. (See Figure 2.)
The report's findings echo the experience of many major companies, which have reported in their Securities and Exchange Commission (SEC) filings that they exceeded their supply chain budget spending in 2018.
The biggest increase occurred in the area of inventory carrying costs, as companies responded to trade tensions between the United States and China by building up their inventories before tariffs went into place. Inventory levels rose 4.6 percent year-over-year in 2018, and inventory carrying costs rose 14.8 percent. Meanwhile transportation costs jumped up 10.4 percent, with every mode experiencing an increase. Particularly big increases were seen in intermodal, which spiked up 28.7 percent, and in the private or dedicated fleet market, where costs rose 13.1 percent. The increase in these two modes was driven by shippers seeking alternatives to common carriers, which saw rising rates in the first half of the year, particularly in the spot market.
The report attributes the rising logistics costs to four factors:
- The continuing growth in e-commerce sales (an increase of 14.2 percent over the previous year) has meant that many companies have had to redesign their supply chain networks. For example, the rise in urban fulfillment needs has led many companies to turn to smaller, more costly warehouses.
- Existing truck fleets saw an extremely high utilization rate in 2018 due to growing demand. As a result, truck capacity was tight, and rates spiked.
- Government regulations on driver "hours of service" forced many smaller trucking companies to cease operation, consolidate, or be acquired.
- The low unemployment rate made it harder to attract and retain truck drivers and warehouse workers, causing companies to increase wages. In many cases, carriers and warehouse providers passed these costs on to their customers.
Cresting the hill
While the economy boomed in 2018, many economists anticipate that growth will soften in the later part of 2019. As a result, shippers can expect that transportation costs will ease somewhat in the upcoming year, according to the report. For example, trucking capacity started to catch up to demand in the second half of 2018, and freight rates have begun to slide back to "normal levels." The report also predicts that the air freight and ocean shipping sectors will not match the cost increases seen in 2019.
"[The logistics industry] has overcome a tough and exhausting year," said Michael Zimmerman, partner with A.T. Kearneyand co-author of the 2019 report. "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.'"
The authors predict that economic realities—particularly the tight labor market—will drive many companies to embrace new technologies and innovations in the upcoming years. They anticipate increases in automated trucks and warehouses and in vehicle electrification. In particular, the report emphasizes the positive impact that the rollout of the 5G mobile broadband and communications standard will have on the logistics industry. The new standard will enable faster download and transfer speeds, greater connectivity and device density, and greater energy efficiency. In the near-term, it will help reduce the cost of operations for existing information technology (IT) and increase visibility across the supply chain. In the long term, according to the report, 5G will enable large-scale deployments of emerging technologies such as the Internet of Things, robotics, artificial intelligence, drones, and real-time tracking.
The report also sounded an optimistic note on greater collaboration between shippers and carriers. The report says that more shippers are moving beyond having an adversarial relationship with their transportation providers and are instead embracing concepts such as shipper of choice programs, collaborative contracts, and asset-sharing models for better use of last-mile drivers and warehousing space. More shippers, carriers, and third-party logistics providers are also collaborating on supply chain network design.
