Logisticians are continuing to squeeze efficiencies from the U.S. freight transportation system as total logistics costs fell for the first time in six years, an influential new report says.
U.S. business logistics costs decline for the first time since 2009 even as the booming e-commerce sector “propelled demand” for small parcel delivery services.
That’s the major takeaway from the 28th annual State of Logistics report co-developed by A.T. Kearney and the Council of Supply Chain Management Professionals (CSCMP). It was released today at the National Press Club.
Traditional transport modes – trucking, rail, water and air cargo – were challenged in 2016 by overcapacity, rate pressures and sluggish demand. But U.S. business logistics costs fell 34 basis points last year to near-record 7.5 percent of Gross Domestic Product. That is just off the record of 7.4 percent of GDP set in the Great Recession year of 2009.
By comparison in 1979, the last year before the Motor Carrier Act deregulated the interstate trucking industry, logistics costs were over 18 percent of GDP in the regulated environment.
The report entitled “Accelerating Into Uncertainty” said the logistics industry appears destined for a prolonged bout of “cognitive dissonance.” That’s because of frustration over subpar growth in overall GDP amid rising stock market, technology investments and consumer confidence data. But that uncertainty has not slowed the pace of change, the report warns.
“On the contrary, industries are churning with disruption as newcomers and incumbents vie for market share and innovation undermines old business models,” the report said before warning: “One thing is certain: ‘business as usual’ won’t return.”
U.S. business logistics costs fell 1.5 percent last year after rising at a five-year compound annual rate of 4.6 percent from 2010 to 2015, the report said. Costs fell across all three components—transportation, inventory carrying and miscellaneous costs.
“The declines reflect overcapacity, slack volumes, and rate pressures in several sectors, even as demand and prices rose in others,” the report added.
Logistics experts agreed. Marc Althen, president of Penske Logistics, struck an optimistic tone in the report.
“The good news is supply chain activity is accelerating,” Althen said in the report. “Warehousing is very active, and demand for our technological solutions is strong.”
But on the other hand, overcapacity is squeezing profit margins. Penske estimates a glut of 115,000 surplus Class 8 trucks are operating today, up from 75,000 a year ago.
Trucking, which hauls about 75 percent of goods by value in the U.S., continued to struggling with overcapacity in 2016, especially in the $270 billion truckload sector.
TL costs fell 1.6 percent last year, even as its five-year compound growth rate rose 4.3 percent from 2010 to 2015. The smaller $58 billion LTL sector, by comparison, enjoyed 0.5 percent rise last year even as its five-year CAGR fell 1.2 percent. The $268 billion private trucking market costs rose 0.7 percent as its five-year CAGR was up 5.7 percent, the report said.
Overall motor carrier costs fell 0.4 percent last year as five-year growth rates were up 4.3 percent. The trucking industry was estimated to be $595 billion of the total $894 billion transport market that includes $73 billion in pipeline and water.
Parcel carriers, namely UPS, FedEx and U.S. Postal Service, fared the best while riding the e-commerce wave. Parcel costs rose 10 percent in the $86 billion sector as five-year CAGR was 6.4 percent.
Transportation professionals of all political stripes are urging Washington not to risk anything close to a trade war even as politicians threaten to renegotiate the 23-year-old North American Free Trade Agreement (NAFTA).
Transport pros are saying that technological change will drive the new supply chains of the future across all borders regardless of mode.
“The demands on this new dynamic supply chain must be met with the promise of adoption and integration of technologies that bring us new efficiencies and value to the supply chain,” YRC Worldwide CEO James Welch says in the report. “It’s up to all of us to make it happen.”