The 28th annual "State of Logistics Report" 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 towards 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.
Modal spending: some up, some down
Truckload expenditures, the largest line item among the cost categories, fell 1.6 percent year-over-year
to $269.4 billion. That may not be the case by the time next year's report comes out. It is "not sustainable"
for so many carriers to accept noncompensatory margins; shippers should therefore expect to see higher trucking
prices in the fourth quarter of 2017 and first quarter of 2018, said Marc Althen, president of Penske Logistics,
at a June 20 press conference in Washington where the report was released.
Rail carload expenditures, buffeted by continued weakness in coal volumes and declines in spending on energy
exploration and development caused by lower oil prices, fell by 13.8 percent, according to the report. Intermodal
spending declined 2.5 percent. Rail demand was "anomalously low" last year, and volumes and associated spending
should rise this year, said Beth Whited, executive vice president and chief marketing officer for western railroad
Union Pacific Corp., at the press conference.
Whited said she expects single-digit volume increases in 2017, with coal and grain exports leading the way,
and "a significant jump" in 2018 as new chemical production facilities begin to pump out product.
Spending on water transportation, which covers both domestic and U.S. import and export traffic, dropped
10 percent, reflecting persistent liner overcapacity and rate pressures on international trade lanes, according
to the report. Airfreight spending, which includes domestic and U.S. export and import cargo, rose 1.5 percent.
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.
Whited cautioned shippers that rates could rise across the modal board sooner than they think. "Shippers have enjoyed
unrealistically low supply chain costs" for years, Whited said. While railroads have shown "good discipline" in pricing,
other modes have not; as a result, there will likely be "more consolidation and rationalization" in those modes, which
could raise prices, she said.
Warehouse space fell 10 percent from the first quarter of 2016 to the same period in 2017, the report said. However,
spending on warehouse services rose just 1.8 percent over 2015 levels, about half the pace of its five-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 include obsolescence, shrinkage, insurance,
and handling, fell 3.2 percent.
These muted levels may not last, however. Decisions by 21 states to raise their minimum wage and the need for
e-commerce warehouse operators to invest in expensive automated material handling systems will have "a significant
effect" on warehouse costs, Sean Monahan, an A.T. Kearney partner and the report's lead author, said at the press
conference.
Different directions
The decline in transportation spending came amid a rise in energy prices off of multiyear 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 said they 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. It is also constructing an air cargo hub in Cincinnati to support
its two-day delivery service, 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 comparison 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 overordering.
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.
Editor's note: This article has been updated with quotes from the June 20, 2017 press conference.
CSCMP's Supply Chain Quarterly Editor Toby Gooley contributed to this report.
The number of container ships waiting outside U.S. East and Gulf Coast ports has swelled from just three vessels on Sunday to 54 on Thursday as a dockworker strike has swiftly halted bustling container traffic at some of the nation’s business facilities, according to analysis by Everstream Analytics.
As of Thursday morning, the two ports with the biggest traffic jams are Savannah (15 ships) and New York (14), followed by single-digit numbers at Mobile, Charleston, Houston, Philadelphia, Norfolk, Baltimore, and Miami, Everstream said.
The impact of that clogged flow of goods will depend on how long the strike lasts, analysts with Moody’s said. The firm’s Moody’s Analytics division estimates the strike will cause a daily hit to the U.S. economy of at least $500 million in the coming days. But that impact will jump to $2 billion per day if the strike persists for several weeks.
The immediate cost of the strike can be seen in rising surcharges and rerouting delays, which can be absorbed by most enterprise-scale companies but hit small and medium-sized businesses particularly hard, a report from Container xChange says.
“The timing of this strike is especially challenging as we are in our traditional peak season. While many pulled forward shipments earlier this year to mitigate risks, stockpiled inventories will only cushion businesses for so long. If the strike continues for an extended period, we could see significant strain on container availability and shipping schedules,” Christian Roeloffs, cofounder and CEO of Container xChange, said in a release.
“For small and medium-sized container traders, this could result in skyrocketing logistics costs and delays, making it harder to secure containers. The longer the disruption lasts, the more difficult it will be for these businesses to keep pace with market demands,” Roeloffs said.
Jason Kra kicked off his presentation at the Council of Supply Chain Management Professionals (CSCMP) EDGE Conference on Tuesday morning with a question: “How do we use data in assessing what countries we should be investing in for future supply chain decisions?” As president of Li & Fung where he oversees the supply chain solutions company’s wholesale and distribution business in the U.S., Kra understands that many companies are looking for ways to assess risk in their supply chains and diversify their operations beyond China. To properly assess risk, however, you need quality data and a decision model, he said.
In January 2024, in addition to his full-time job, Kra joined American University’s Kogod School of Business as an adjunct professor of the school’s master’s program where he decided to find some answers to his above question about data.
For his research, he created the following situation: “How can data be used to assess the attractiveness of scalable apparel-producing countries for planning based on stability and predictability, and what factors should be considered in the decision-making process to de-risk country diversification decisions?”
Since diversification and resilience have been hot topics in the supply chain space since the U.S.’s 2017 trade war with China, Kra sought to find a way to apply a scientific method to assess supply chain risk. He specifically wanted to answer the following questions:
1.Which methodology is most appropriate to investigate when selecting a country to produce apparel in based on weighted criteria?
2.What criteria should be used to evaluate a production country’s suitability for scalable manufacturing as a future investment?
3.What are the weights (relative importance) of each criterion?
4.How can this methodology be utilized to assess the suitability of production countries for scalable apparel manufacturing and to create a country ranking?
5.Will the criteria and methodology apply to other industries?
After creating a list of criteria and weight rankings based on importance, Kra reached out to 70 senior managers with 20+ years of experience and C-suite executives to get their feedback. What he found was a big difference in criteria/weight rankings between the C-suite and senior managers.
“That huge gap is a good area for future research,” said Kra. “If you don’t have alignment between your C-suite and your senior managers who are doing a lot of the execution, you’re never going to achieve the goals you set as a company.”
With the research results, Kra created a decision model for country selection that can be applied to any industry and customized based on a company’s unique needs. That model includes discussing the data findings, creating a list of diversification countries, and finally, looking at future trends to factor in (like exponential technology, speed, types of supply chains and geopolitics, and sustainability).
After showcasing his research data to the EDGE audience, Kra ended his presentation by sharing some key takeaways from his research:
China diversification strategies alone are not enough. The world will continue to be volatile and disruptive. Country and region diversification is the only protection.
Managers need to balance trade-offs between what is optimal and what is acceptable regarding supply chain decisions. Decision-makers need to find the best country at the lowest price, with the most dependability.
There is a disconnect or misalignment between C-suite executives and senior managers who execute the strategy. So further education and alignment is critical.
Data-driven decision-making for your company/industry: This can be done for any industry—the data is customizable, and there are many “free” sources you can access to put together regional and country data. Utilizing data helps eliminate path dependency (for example, relying on a lean or just-in-time inventory) and keeps executives and managers aligned.
“Look at the business you envision in the future,” said Kra, “and make that your model for today.”
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.