"State of Logistics Report": U.S. business logistics costs hit $1.45 trillion in 2014, up 3.1 percent from 2013 | June 24, 2015 | The Supply Chain Xchange
"State of Logistics Report": U.S. business logistics costs hit $1.45 trillion in 2014, up 3.1 percent from 2013
Logistics costs accounted for 8.3 percent of U.S. GDP last year, according to the annual report issued by the Council of Supply Chain Management Professionals (CSCMP).
Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Editor at CSCMP's Supply Chain Quarterly. and Senior Editor of SCQ's sister publication, DC VELOCITY. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.
The cost of operating the U.S. business logistics system in 2014 rose 3.1 percent to slightly less than $1.45 trillion, equal to about 8.3 percent of the nation's gross domestic product (GDP), according to the 26th annual "State of Logistics Report," released on Tuesday in Washington, D.C. The report is issued by the Council of Supply Chain Management Professionals (CSCMP) and presented by third-party logistics provider Penske Logistics.
The report said that 2014 was the best year for U.S. logistics since the start of the Great Recession in 2007. Barring unforeseen events in this year's second half, 2015 should show strong growth despite a weak first quarter caused by inclement weather, a stronger dollar that curbed export activity, and problems caused by labor strife at West Coast ports, the report forecast. "The U.S. economy is on fairly solid ground" with unemployment falling, real net income and household net worth inching up, low to moderate inflation, and declining oil prices putting more money in Americans' pocketbooks, wrote Rosalyn Wilson, the report's author.
"We're actually seeing some very sustained growth, in my opinion," she added in remarks during the press conference where the report was released.
Logistics costs as a percentage of GDP, one of the report's most frequently cited data points, has stayed within a range of 8.2 percent to 8.4 percent since 2010. However, Wilson, in an e-mail interview prior to the report's release, said that the current levels are likely unsustainable and that the ratio will eventually rise to levels of 9 to 9.5 percent as a dramatic tightening of motor carrier capacity causes freight rates to climb. That truck rates did not surge in 2014 was one of the biggest surprises in the report's findings, Wilson said in the interview.
While truck revenues rose 3 percent over 2013, tonnage gained 3.5 percent, meaning that rates remained relatively flat, according to the report. Trucking costs—measured as carrier revenues—accounted for slightly less than half of the total expense of the nation's logistics system.
"Carriers seem to still be spooked by the lean years when there was not enough freight to go around, and they are ... reticent to pass up freight even if (rates) are negotiated downward," said Wilson, a senior business analyst with Pasadena, Calif.-based Parsons Corp., an engineering and construction firm. She said shippers succeeded last year in whittling down proposed rate increases from 6 to 8 percent to levels approaching 2 percent. But that practice cannot continue indefinitely, especially as carrier capacity shrinks to extraordinary levels, Wilson said. "At some point, rates have to rise, and I think we'll see that by the end of this year," she said at the press conference.
When the pricing picture turns, it will likely be a quick and sharp change with one of the big carriers taking the lead and others following suit, Wilson said in the interview before the report's release. In her report, she advised shippers to pay more attention to carriers' capacity guarantees than to the rates they charge, and to work with carriers to optimize their equipment utilization. Shippers that do both stand the best chance of mitigating 2015 rate increases because carriers will be more willing to keep rates steady if they know their equipment and drivers were being turned faster and more efficiently, she said.
Speaking at the press conference on a panel with other logistics professionals, Mary Long, vice president of logistics and network planning for Ann Arbor, Mich.-based food chain Domino's Pizza, Inc., said Domino's is trying to make greater use of its private fleet for backhauls and has invested in additional equipment and drivers. Shawn E. Wattles, director of supply chain logistics for Chicago-based Boeing Co., said the aircraft manufacturing giant is also trying to maximize private fleet use, although the fleet only operates in Washington state, formerly the locale of Boeing's corporate headquarters and where it still maintains sizable operations. An increasing number of shippers are looking for hybrid solutions that allow them to take advantage of both for-hire and dedicated contract carriage, added Joe Carlier, vice president, sales for Reading, Pa.-based Penske Logistics. Penske has seen an increase of about 20 percent in the number of customers requiring such a solution, he said.
Although it is hard to match people, equipment, and infrastructure resources with demand, BNSF Railway is "in good shape" when it comes to capacity, velocity, and service, said Dean Wise, vice president of network strategy for Fort Worth, Texas-based railroad. Nevertheless, the rail industry, which has made record-high investments in infrastructure in the past few years, is concerned that port congestion could shift to the East Coast, Wise said. Another worry is that federal funding for highways and intermodal connectors, together with a slowdown in the issuance of permits for various expansion projects, could make it more difficult to maintain the gains that have been made, he said.
Panelists predicted the effects of the recent congestion and delays at West Coast ports, caused by the nearly year-long contract fight between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), would linger for some time to come. Ronald M. Marotta, vice president, international division for Yusen Logistics, a global freight forwarding and logistics concern in Secaucus, N.J., said the efficient, service-conscious Port of Savannah has gained permanent new business from shippers that had a positive experience after re-routing freight that would normally have entered the U.S. over the West Coast. Although activity at the West Coast ports is "more fluid" with "better velocity" than before, all stakeholders must continue working toward permanent improvement, Marotta said. "We've had some success, and I'm very certain next year will be better," he said.
The third-party logistics (3PL) segment turned in a strong performance in 2014 with net revenue—revenue after factoring in transportation costs—rising 7.4 percent, according to the report. Domestic transportation management and dedicated contract carriage services rose by 20.5 and 10.4 percent, respectively, as tightening truck capacity drove demand for those services. International transportation management and value-added warehousing and distribution services each posted low-single-digit increases. The overall 3PL market is expected to rise in 2015 by 5.7 percent. The 3PL data in the report came from Armstrong & Associates Inc., a consulting firm that closely covers that segment.
Rail intermodal volumes rose 5.2 percent last year, continuing a pattern of solid multiyear growth for the sector as it on-boarded new business as well as conversions from truckload services. Rail carloads rose 3.9 percent, while overall revenue increased 6.5 percent. Ocean containerized imports and exports rose slightly year-over-year, while air cargo revenue declined 1.2 percent, paced to the downside by a 3.6 percent drop in international revenue. The current downward trend in exports will likely continue in the coming months as the strong dollar continues to make U.S. products more expensive in overseas markets, Wilson said. "I don't see exports recovering, at least before the end of the year," she said.
INVENTORY CARRYING COSTS ON THE RISE
Inventory carrying costs rose 2.1 percent last year despite a 4.8 percent decline in the interest component as interest rates remained at historically low levels. Business inventory levels increased by 2.1 percent as taxes, obsolescence, depreciation, and insurance rose by 1.2 percent due to the growth in inventories. Warehousing costs rose 4.4 percent, capping off a second consecutive solid year as demand for warehouse space from e-commerce providers remained strong. U.S. retail e-commerce sales hit $237 billion 2014, up from $211 billion in 2013, according to the report.
In the e-mail interview, Wilson forecast further increases in carrying costs as interest rates finally begin to rise and warehousing demand—and expenses—continue to escalate.
The inventory-to-sales ratio, which measures a business' inventory investment in relation to its monthly sales, rose rapidly in 2014, the report found. The ratio ended 2014 at 1.35, its highest level since late 2009. A rising ratio generally indicates declining sales or excess inventory levels.
The rise was due largely to wholesalers and retailers ordering more goods in anticipation of labor- and congestion-related delays at West Coast ports, combined with slower-than-expected holiday sales, the report said. The wholesale and retail ratios leveled off and the ratio for manufacturing began to trend downward in Q1 of 2015, according to the report.
In an interview following the press conference, Wilson said she expects the overall inventory-to-sales ratio to decline. Rising inventory carrying and obsolescence costs, combined with escalating warehousing expenses, will provide an incentive for companies to get their inventory levels under control, she said.
"I'm concerned that inventories are as high as they are, but ... manufacturers are using up the supplies that they have. Nobody is ready to make big investments in more inventory," she said.
Editor's Note: This story was updated on June 25, 2015.
Supply Chain Xchange Executive Editor Susan Lacefield moderates a panel discussion with Supply Chain Xchange's Outstanding Women in Supply Chain Award Winners (from left to right) Annette Danek-Akey, Sherry Harriman, Leslie O'Regan, and Ammie McAsey.
Supply Chain Xchange recognized four women who have made significant contributions to the supply chain management profession today with its second annual Outstanding Women in Supply Chain Award. The award winners include Annette Danek-Akey, Chief Supply Chain Officer at Barnes & Noble; Sherry Harriman, Senior Vice President of Logistics and Supply Chain for Academy Sports + Outdoors; Leslie O’Regan, Director of Product Management for DC Systems & 3PLs at American Eagle Outfitters; and Ammie McAsey, Senior Vice President of Customer Distribution Experience for McKesson’s U.S. Pharmaceutical division.
Throughout their careers, these four supply chain executive have demonstrated strategic thinking, innovative problem solving, and effective leadership as well as a commitment to giving back to the profession.
The awards were presented at the Council of Supply Chain Management Professionals (CSCMP) annual EDGE Conference in Nashville, Tenn. In addition to the awards presentation, the leaders discussed their leadership philosophies and career path during a panel discussion at the EDGE conference.
The surge of “nearshoring” supply chains from China to Mexico offers obvious benefits in cost, geography, and shipping time, as long as U.S. companies are realistic about smoothing out the challenges of the burgeoning trend, according to a panel today at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
Those challenges span a list including: developing infrastructure, weak security, manual processes, and shifting regulations, speakers said in a session titled “Nearshoring: Transforming Surface Transportation in the U.S.”
For example, a recent Mexican government rail expansion added lines to tourist destinations in Cancun instead of freight capacity in the Southwest, said panelist Edward Habe, Vice President of Mexico Sales, for Averitt. Truckload cargo inspections may rely on a single person looking at paper filings on the border, instead of a 24/7 online system, said Bob McCloskey, Director for Logistics and Distribution at Clarios, LLC. And business partners inside Mexico often have undisclosed tier-two, tier-three, and tier-four relationships that are difficult to track from the U.S., said Beth Kussatz, Manager of Northern American Network Design & Implementation, Deere & Co.
Still, dedicated companies can work with Mexican authorities, regulators, and providers to overcome those bottlenecks with clever solutions, the panelists agreed. “Don’t be afraid,” Habe said. “It just makes sense in today’s world, the local regionalization of manufacturing. It’s in our interest that this works.”
A quick reaction in the first 24 hours is critical for keeping your business running after a cyberattack, according to Estes Express Lines, the less than truckload (LTL) carrier whose computer systems were struck by hackers in October, 2023.
Immediately after discovering the breach, the company cut off their internet, called in a third-party information technology (IT) support team, and then used their only remaining tools—employees’ personal email and phone contacts—to start reaching out to their shipper clients. The message on Day One: even though the company was reduced to running the business with paper and pencil instead of computers, they were still picking up loads on time with trucks.
“Customers never want to hear bad news, but they really don’t want to hear bad news from someone other than you,” the company’s president and COO, Webb Estes, said in a session today at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
After five or six painful days, Estes transitioned from paper back to computers. But they continued sending clients daily video updates from their president, and putting their chief information officer on conference calls to answer specific questions.
Although lawyers had advised them not to be so open, the strategy worked. It took 19 days to get all computer systems running again, but at the end of the first month they had returned to 85% of their original client list, and now have 99% back, Estes said in the session called “Hackers are Always Probing: Cybersecurity Recovery and Prevention Lessons Learned.”
As the final hours tick away before a potential longshoreman’s strike begins at midnight on the U.S. East and Gulf coasts, experts say the ripples of that move could roll across the entire U.S. supply chains for weeks.
While some of the nation’s largest retailers were able to pull their imports forward in recent weeks to soften the blow, “the average supply chain is ill-prepared for this,” Tom Nightingale, the former CEO of AFS Logistics, said in a panel discussion today at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
Despite that grim prognosis, a strike seems virtually unavoidable, CSCMP President & CEO Mark Baxa said from the stage. At latest report, the White House had declined to force the feuding parties back into arbitration through its executive power, and a voluntary last-minute session had failed to unite the International Longshoremen’s Association (ILA)’s 45,000 union members with the United States Maritime Alliance that manages the 36 ports covered under their expiring contract.
The ultimate impact of a resulting strike will depend largely on how long it lasts, the panelists said. With a massive flow of 140,000 twenty foot equivalent units (TEUs) of shipping containers moving through the two coasts each week, each day of a strike will require 7 to 10 days of recovery for most types of goods, Nightingale said.
Shippers are desperately seeking coping mechanisms, but at this point the damage will add up fast, whether a strike lasts for an optimistic “option A” of just 48 to 72 hours, a pessimistic “Option B” of 7 to 10 days, or even longer, agreed Jon Monroe, president of Jon Monroe Consulting.
The first full day of CSCMP’s EDGE 2024 conference ended with the telling of a great American story.
Author and entrepreneur Fawn Weaver explained how she stumbled across the little-known story of Nathan Green and, in deciding to tell that story, launched the fastest-growing and most award-winning whiskey brand of the past five years—and how she also became the first African American woman to lead a major spirits company.
Weaver is CEO of Uncle Nearest Premium Whiskey, a company she founded in 2016 and that is part of her larger private investment business, Grant Sidney, Inc. Weaver told the story of "Nearest" Green—as Nathan Green was known in his hometown of Lynchburg, Tenn.—to Agile Business Media & Events Chairman Mitch MacDonald, in a keynote interview Monday afternoon.
As it turns out, Green—who was born into slavery and freed after the Civil War—was the first master distiller for the Jack Daniel’s Whiskey brand. His story was well-known among the local descendants of both Daniel and Green, but a mystery in the larger world of bourbon and a missing piece of American history and culture. Through extensive research and interviews with descendants of the Daniel and Green families, Weaver discovered what she describes as a positive American story.
“I believed it was a story of love, honor, and respect,” she told MacDonald during the interview. “I believed it was a great American story.”
Weaver told the story in her best-selling book, Love & Whiskey: The Remarkable True Story of Jack Daniel, His Master Distiller Nearest Green, and the Improbable Rise of Uncle Nearest, and has channeled it into an even larger story with the founding of the brand. Today, Uncle Nearest Premium Whiskey is made at a 323-acre distillery in Shelbyville, Tenn.—the first distillery in U.S. history to commemorate an African American and the only major distillery in the world owned and operated by a Black person.
Weaver and MacDonald's wide-ranging discussion covered the barriers Weaver encountered in bringing the brand to life, her vision for where it’s headed, and her take on the supply chain—which she said she views as both a necessary cost of doing business and an opportunity.
“[It’s] an opportunity if you can move quickly,” she said, emphasizing a recent project to fast-track a new Uncle Nearest product in which collaborating with the company’s supply chain partners was vital.
Uncle Nearest Premium Whiskey has earned more than 600 awards, including “World’s Best” by Whisky Magazine two years in a row, the “Double Gold” by San Francisco World Spirits Competition, and Wine Enthusiast’s “Spirit Brand of the Year.”
CSCMP’s EDGE 2024 runs through Wednesday, October 2, at the Gaylord Opryland Hotel & Convention Center in Nashville.