The tailwind of low inventory carrying costs that U.S. businesses have enjoyed in recent years came to an end in 2015, and carrying costs are likely to prove a tougher challenge should the cost of money become dearer, according to the 27th annual "State of Logistics Report." The report was written by the consulting firm A.T. Kearney for the Council of Supply Chain Management Professionals (CSCMP) and is presented by Penske Logistics.
According to the report, released today in Washington, D.C., inventory carrying costs in 2015 rose 5.1 percent over the year-earlier period, paced by a 7.4-percent increase in the inventory's "financial cost." The financial cost was derived by multiplying the value of a company's business inventory by the average cost of capital it has borrowed to finance the inventory.
Storage costs, which were included in the total inventory calculation, rose 2.5 percent year-over-year, according to the report. The cost of what the report classifies as "other" factors, including inventory obsolescence, insurance, and handling, rose 5.1 percent year-over-year.
Following the U.S. Federal Reserve's moves to cut its benchmark federal funds rate (an overnight interbank lending rate) amid the 2007-08 financial crisis and subsequent recession, inventory carrying costs have sat at historic lows. From 2010 to 2014, capital costs grew by just 0.9 percent, compounded annually, the report concluded. By contrast, storage costs rose 4.7 percent a year, compounded annually.
In December, the Fed raised the benchmark rate from between near zero and 0.25 percent to between 0.25 and 0.50 percent, its first increase in nearly 10 years. The central bank said at the time it was considering several rate increases during 2016, but subpar economic growth in the United States and abroad since then has led policymakers to rethink that position.
From 2010 to 2014, a period generally associated with U.S. economic growth, inventories rose 5 percent a year as businesses restocked in the hope of increased demand, and mega-fulfillment centers were erected to accommodate what would become a multiyear surge in e-commerce traffic. Though inventory levels flattened in 2015—rising just 0.25 percent—the cost of capital did not, the report concluded.
Businesses today have costlier inventory loads to finance than at any time in years. In 2009, inventory value stood at $1.93 trillion. At the end of 2015, it stood at $2.51 trillion, according to the report's data.
The nation's inventory-to-sales ratio, which in the retail trade measures the value of inventories relative to final sales, has been climbing steadily for years, resulting in a protracted inventory bloat. Despite concerns over rising inventory levels and higher borrowing costs, the report's authors do not forecast a general recession. Rather, they say the current trends—notably, the dramatic slowdown in inventory growth last year—represent an "inventory correction." They also expect a rebound in freight volumes and revenues as 2016 progresses.
All told, it cost $1.4 trillion to maintain the U.S. business logistics system in 2015. That equated to 7.85 percent of last year's gross domestic product (GDP) of more than $17 trillion. Logistics costs rose 2.6 percent year-over-year, a decline from the 4.6 percent compounded annual growth rate (CAGR) from 2010 to 2014. The gains during that period were mostly fueled by 5.5 percent annualized growth in transport costs, the report said. However, transport costs in 2015 rose just 1.3 percent year-over-year, as declining fuel surcharges triggered by the rapid drop in oil prices depressed carrier revenue.
Logistics costs as a percentage of GDP, historically one of the report's most often-quoted data points, was just six basis points below last year's number, indicating that the system was operating in only a marginally more efficient manner than the year before, according to the report. In the early 1980s, long before the impact of transport deregulation was fully felt, logistics costs accounted for about 15 percent of GDP. The dramatic increase in transportation and logistics efficiency during the last 35 years has been an overlooked factor in the success of the U.S. economy during much of that period.
Transport revenue by mode diverged considerably in 2015, according to the report. Less-than-truckload (LTL) and parcel revenues rose 7 and 8 percent respectively, as both modes benefited from increased demand for e-commerce-related transactions. However, truckload revenue rose just 3 percent, intermodal revenue rose 2 percent, and airfreight and water revenues—which include import, export, and domestic waterborne traffic—increased 2.1 percent. Rail carload revenues, hurt by a sharp decline in coal demand, fell 12 percent, while pipeline revenues, hampered by lower crude oil prices, fell 11.8 percent, according to the report.
The divergence in modal revenue is a harbinger of long-term change, according to the report's authors. A profound change in buying habits has now put American consumers "at the wheel" when it comes to influencing U.S. transport costs, rather than traditional industrial standbys like energy. This change may be permanent, the authors said.
The "State of Logistics Report" was prepared by A.T. Kearney in partnership with CSCMP and other stakeholders. This is Kearney's first attempt at the report, which was launched by the consultant Robert V. Delaney and was continued by his associate, Rosalyn Wilson, after Delaney's death in 2004.
Editor's note: Go here to watch a video of the June 21 "State of Logistics Report" presentation at the National Press Club in Washington, D.C. A video of the panel discussion that followed the report's release is available here.
Ron Marotta of Yusen Logistics listens to Rick DiMaio of Ace Hardware talk about the steps Ace is taking to keep its store stocked after Hurricane Helene and during the East and Gulf Coast Port Strike.
The East and Gulf Coast port strike was the top discussion point during a panel discussion of shippers and logistics providers at the Council of Supply Chain Management Professionals (CSCMP) annual EDGE Conference this morning. The session, which was supposed to be focused on providing an update to CSCMP’s “2024 State of Logistics Report,” quickly shifted to addressing the effect that the strike by nearly 50,000 dockworker at 36 ports in the Eastern half of the U.S. could have on supply chains.
“The seriousness of this action cannot to be taken lightly,” said Ron Marotta, vice president of the freight forwarder and supply chain service provider Yusen Logistics (America). “It has not happened since 1977. Our lives depend on sustaining a smooth global supply chain.”
Marotta warned that for every day that the ports were not open, it would take four to five days to recover from the impact. One added concern is how the port closures would affect recovery efforts for Hurricane Helene. “There’s a huge amount of item that would normally be replenished by importers and retailers,” Marotta said.
Rick DiMaio, executive vice president and chief supply chain officer, for Ace Hardware Corp., commented that the hardware retail cooperative was doing okay for now keeping stores in stock, although he did expect the company would be “chasing generators for awhile.” “But in this recovery phase [from the hurricane], we certainly don’t need a strike right now,” he said.
The port closure will also have a knock-on effect on other transportation modes. For example, Andy Moses, senior vice president of sales and solutions for logistics services provider Penske Logistics, expects to see some companies turn to air freight as a result of the strike. This will, in turn, cause air freight capacity to tighten up and rates to rise. Furthermore, the longer the ports are closed, the more likely inflation is to rise again, according to Moses.
Nor will the effects of the strike stop at the U.S. border, according to Marotta. Many Caribbean Island nations depend on food import from the U.S. that move through East Coast ports. Additionally, some medical supplies typically are exported through the ports to Europe.
On a positive note, however, many companies took actions earlier in the year to prepare themselves for a potential strike. Ammie McAsey, senior vice president of customer distribution experience for the pharmaceutical distributor McKesson, said the pharmaceutical industry has brought in enough extra inventory that there will not be a short-term impact on the U.S. health care system due to the strike.
Government intervention?
Marotta hopes that the U.S. government takes the step of invoking the Taft-Hartley Act to stop the strike and send the International Longshoremen’s Association (ILA) and the port management group, United States Maritime Alliance (USMX) back to the negotiation table. In 2002, for example, President George W. Bush used the Taft-Hartley Act to end an 11-day lockout of union workers at West Coast ports. President Joe Biden, however, told reporters on Sunday that he would not do this.
“I hope that cooler heads prevail and that the executive branch realizes that it’s not just a labor issue, it’s also a humanitarian issue,” Marotta said.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.