While it's good to know where you've been, it's just as important to know where you are now and where you're going. It was this belief that led us to develop the Logistics Managers Index (LMI) four years ago. We believed that the logistics industry can provide an indicator of where the economy as a whole is heading.
When we read about the economy in business newspapers or magazines or hear about it on the radio or TV, we usually see it discussed in terms of gross domestic product (GDP). GDP is certainly the most popular method of measuring an economy's output and is usually considered an indicator of the size of an economy.
But while GDP does a good job of calculating the total value of final goods and services produced within a specific country, it has its limitations. With GDP, the emphasis is on the word "final." It measures the economic activity in the last mile or the final stage in the supply chain as it makes its way to the consumer. As a result, GDP misses the upstream activities by only measuring once right at the end of the supply chain. This underestimates the size of the activities in a supply chain or an economy.
GDP only tells what already happened in an economy, it does not give much information about what is currently happening or is likely to happen in the future. It is a lagging indicator and not a leading indicator.
To fully understand what is happening and what is likely to happen within an economy, upstream activity needs to be measured. These measures do not necessarily have to replace metrics such as GDP, but they are needed to get a full picture of current and future trends.
The Logistics Managers Index is an attempt to measure important elements of the economy throughout the supply chain in the United States. Researchers have found that inventories, transportation capacity and prices, and warehousing are elements of the economy that are found at every step in the supply chain. By looking at changes in these economic components, we can better see what is currently happening and what is likely to happen in the near future.
The LMI is a monthly cooperative research venture between several supply chain management universities and the Council of Supply Chain Management Professionals (CSCMP). We collect data directly from logistics and supply chain executives having to do with trends in warehousing, transportation, and inventory across a wide spectrum of industries. The Logistics Managers' Index consists of eight metrics as well as an overall index score. When interpreting our results, any value above 50.0 indicates growth, and any value below 50.0 indicates contraction. Put simply, higher numbers=more growth, and lower numbers=more contraction.
The table in Figure 1 shows the December 2019 scores for each of the eight components of the Logistics Managers' Index (as well as the overall index score) and compares them to the numbers for November 2019.1 As you can see, six of the eight metrics show signs of growth, but many of them are moving at lower or considerably decreased rates.
In fact, the December 2019 LMI reading of 54.0 (rounded up from 53.96) was the lowest score in the 40-month history of the index (see Figure 2). It is down considerably (-9.5) points from December a year ago when the LMI's overall score was 63.5.
While we are still registering growth in the logistics industry, the rate of that growth has been slowing continuously over the past 12 months. Throughout much of 2018, the index registered high levels of growth in the low-to-mid 70s, but then growth began to taper off in late Q3/early Q4. The LMI has trended slowly downward since then, with the nine lowest scores in the history of the index being recorded since March 2019.
Overall the LMI seems to indicate that the United States is currently in an uncertain economic time. While it is possible that we are through the "soft patch" we hit last year, many chief financial officers are still concerned about a recession due to the ongoing trade wars and weakness in other parts of the world.2
Transportation's dynamism
Transportation metrics—which include transportation price, transportation capacity, and transportation utilization—have proven to be the most dynamic measures in the LMI. For most of 2018, Transportation Prices reached into the 80s and 90s, which—considering the scale only goes up to 100.0—is very high. (See Figure 3.) This lined up with the period of growth we saw in the economy. Similar to the overall index, Transportation Price began a dramatic slide starting last fall. However, in December the Transportation Price Index was up 12.0 points to 52.0, from the previous month's reading of 41.0 (which was the lowest point of any metric in the history of the index). Despite the increase, the number for December 2019 was still down sharply (-21.6) from the same time a year ago, when it sat at 74.3. While the metric shows that transportation prices in December were rising, we would actually expect prices to be doing so at a much faster pace, as it is generally a busy month for retail and delivery. It remains to be seen whether the Transportation Price metric will continue to trend upward, or if it's foray into growth in December was a one-time blip tied to the holiday season.
Meanwhile Transportation Capacity was consistent at 57.9, increasing very little (+0.5) from November's reading. However, it should be noted that it is down significantly (-23.9) from December 2018, as there was an excess of capacity built up in 2018, with record fleet orders being placed to match that year's exceptional demand for transportation. Interestingly, Transportation Utilization, the rate at which existing capacity is being used by firms, reached its lowest ever reading, and first-ever negative score, at 47.9. This is down 17.1 points from the December 2018 reading, likely because the transportation market has cooled significantly since then.
Inventory contraction
Historically, inventories have grown in Q3/Q4. However, in 2019 we saw lower than expected rates of growth from August to November and active contraction in December. This is the first negative score for our Inventory Levels metric, which is down sharply (-12.0) to 42.3. It is possible that this contraction is tied to the mass movement of goods due to the holiday season or firms burning off inventories that had been built up previously in an effort to avoid tariffs3 or some combination of the two. Figure 4 compares Inventory Levels from August through December in 2017, 2018, and 2019. Because the LMI captures both manufacturing and retail inventories, we are also likely seeing the dragging effects of the slowing manufacturing sector weighing on this metric.
Inventory Costs are also down slightly (-1.95) to 63.4. While this reading still shows signs of consistent growth, it is worth pointing out that in the previous two years, there were only two readings below 70, and September through December 2019 were all below that value. Inventory Costs are still increasing, but at a slower rate than we had previously recorded. We believe that inventory costs are increasing at a slower rate because inventory levels are growing at a slower rate and because warehouse utilization is also not increasing as quickly.
Based on these inventory metrics, there is reason to believe that companies are backing off on their inventory growth. In particular, as Figure 4 shows, companies did not build up their inventories in advance of the holiday season nearly as much as in previous years. This may be a signal that companies expect sales to be decreasing, or at least not growing.
Warehousing prices continue to rise
Contracting Inventory Levels paired with increasing Inventory Costs could be related to the increase in Warehousing Prices, which is up (+4.9) to 73.2—its highest level since March. The increasing prices are likely due to two distinct factors:
There was no growth in Warehouse Capacity in December, as it was down (-2.13) to 50.0.
Due to the increasing popularity of same- and next-day delivery, more facilities are being located close to large population centers in what tends to be more expensive real estate.
In other words, warehouses are not being built quickly enough to keep up with growing demand, and the facilities that are the most attractive at the moment tend to be the most expensive. Finally, Warehouse Utilization, or the rate at which existing warehouse space is being used by firms, is somewhat consistent (-0.5), reading in at 60.0.
Slowing growth
The December LMI reading marks two years and 16 consecutive readings indicating growth in the logistics industry. However, it also marks 12 consecutive months of declining rates of growth. As the overall LMI metric currently sits at the lowest point in its 40-month history, it clearly indicates a continued trend of slowing yet steady growth in the logistics industry.
It is important to note that growth rates will likely vary by industry. The LMI is unique in that it captures both consumer and manufacturing activity. This seems to align with recent reports of growth in consumer sentiment and spending and a slowdown in manufacturing.4 Logistics often functions as a leading indicator, helping us to know where the economy is heading. The slow, steady growth of metrics tracked in the LMI likely portends slow, if unspectacular, growth in 2020.
1. For a more comprehensive discussion of the December 2019 report, access the PDF version of the report here: https://www.the-lmi.com/december-2019-logistics-managers-index.html. The January 2020 report is available at https://www.the-lmi.com/january-2020-logistics-index-report.html.
J.B. Hunt President and CEO Shelley Simpson answers a question from the audience at the Tuesday afternoon keynote session at CSCMP's EDGE Conference. CSCMP President and CEO Mark Baxa listens attentively to her response.
Most of the time when CEOs present at an industry conference, they like to talk about their companies’ success stories. Not J.B. Hunt’s Shelley Simpson. Speaking today at the Council of Supply Chain Management Professionals’ (CSCMP) annual EDGE Conference, the trucking company’s president and CEO led with a story about a time that the company lost a major customer.
According to Simpson, the company had a customer of their dedicated contract business in 2001 that was consistently making late shipments with no lead time. “We were working like crazy to try to satisfy them, and lost their business,” Simpson said.
When the team at J.B. Hunt later met with the customer’s chief supply chain officer, they related all they had been doing for the company. “We told him that we were literally sitting our drivers and our trucks just for you, just to cover your shipments,” Simpson said. “And he said to us, ‘You never shared everything you were doing for us.’”
Out of that experience, came J.B. Hunt’s Customer Value Delivery framework. This framework, according to Simpson, provides a roadmap for creating value and anticipating customer needs.
Framework for Excellence
J.B. Hunt created the above framework to help them formulate better relationships with customers.
The framework consists of five steps:
Understand customer needs: It all starts, according to Simpson, with building a strong relationship with the customer and then using the information gained from those discussions to build a custom plan for the customer.
Deliver expectations: This step involves delivering on the promises made in that custom plan.
Measure results: J.B. Hunt believes that they are not done when freight makes it to the destination. They also need to measure how successful they were versus what the customer expected from them.
Communicate performance: This step involves a two-way exchange, where J.B. Hunt walks the customer through their performance and gets verbal agreement on whether or not they have met the customer’s needs.
Anticipate new value: Here J.B. Hunt looks at what they are hearing from their customer today and then uses that information to derive what the customer may be looking for in the future.
Simpson said the most important part of the process is the fourth step, communicating performance (perhaps reflecting the piece that went wrong in that initial failed customer relationship).
Not only can this framework be used to drive excellence in a company, but it can also be adapted as a model for driving personal excellence, Simpson said. Instead of understanding the customer needs, the process starts with understanding yourself: what your strengths and interests are. This understanding helps drive a personal development plan and personal goals for the year, which can be measured and assessed. For example, each year, Simpson gives herself a letter grade on each of her personal goals and communicates her assessment back to her boss. She has also found it helpful to anticipate where opportunities lie beyond what she is personally doing.
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.