A weakening demand picture in 2019 may not translate into a decline in U.S. logistics activity or its outlook for the rest of the year, according to the 30th Annual CSCMP State of Logistics Report, presented by Penske Logistics, released on June 18 in Washington, D.C.
Instead, the authors of the report, this year titled “Cresting the Hill” and considered the U.S. logistics industry’s annual report card, contend that the sector may reach some level of equilibrium – and understanding – in 2019 as it moves past one of the most turbulent years in memory, one where tight capacity met with the strongest demand in the post-crash era to produce skyrocketing rate increases. Surging rates in 2018 sent many shippers scrambling for capacity relief of any kind as their transport budgets were eviscerated.
With those events not far in the past, shippers and carriers are moving toward some common ground in which deeper use of information technology tools, and a need to find a better way of transacting business, will become the overarching narrative.
“The authors, sponsors, and interviewees in this report have cause for optimism because…neither shippers nor suppliers seem satisfied with business as usual and the opportunity to leverage technology and collaborative practices is driving tangible efficiencies and shared gains,” wrote the authors, a team of consultants at A.T. Kearney.
If history is any guide, shippers who took it on the chin last year would seize the opportunity spawned by slowing demand and loosening capacity to claw back rate increases, thus triggering another in a series of boom-and-bust cycles. However, the report’s authors “see both hope and evidence of a better road being taken. Leading shippers looking to control logistics costs have leaned more in the direction of constructive engagement and innovation than ever before, and carriers have been pleased with the new collaboration while themselves opening up to start-ups and new technologies for novel solutions to transportation challenges.”
Jill Donoghue, Vice President of Supply Chain for Bumble Bee Seafoods, is one of those companies putting those shipper-carrier partnerships to work.
“It feels like after last year we’re truly coming together to collaborate,” Donoghue commented during a panel discussion at the National Press Club immediately following the release of the report. “It’s no longer about ‘you have to reduce rates,’ it’s more about working together to be more efficient so that both [shippers and carriers] make decent margins.”
Penske Logistics president Marc Althen noted during the discussion that partnership efforts are benefiting third-party logistics companies as well. “More and more shippers are turning to us to help them overcome cost pressures they encountered last year,” Althen said. “We do feel some shippers are looking to us more as a partner.”
Year-over-year cost jump
Underscoring last year’s powerful move in all-modal freight rates, the expense of running the nation’s business logistics system, measured in terms of overall rate increases, rose 11.4 percent in 2018 to $1.64 trillion, according to the report, the largest jump in the last 10 years. Logistics last year accounted for 8 percent of the nation’s $20.5 trillion GDP, a 50 basis-point jump over 2017 figures, the report said.
Overall, transportation costs rose by 10.4 percent. However, the increase was not spread evenly across the modes. Costs of running intermodal and private fleets jumped 28.7 percent and 13.1 percent, respectively, as shippers sought alternatives to common carriers. The U.S. Postal Service saw rates jump 9.7 percent as it gained share in final-mile services.
Net absorption of U.S. industrial warehouse and distribution center space, roughly defined as net occupancies by calculating space built minus space vacated, rose 16.8 percent over the previous year to an all-time high of 284.9 million square feet in 2018. Net absorption totals have exceeded 240 million square feet per year for the past five years, the strongest multi-year run on record, according to the report. The national industrial vacancy rate declined to 4.8 percent in 2018, a record low. Average asking rents for all industrial products across the U.S. reached a new nominal high of $6.14 per square foot, according to the report.
Fourth-quarter shipping activity was especially intense as companies struggled with continued high shipping costs, and accelerated the pace of their imports amid the prospects of higher U.S. tariffs on Chinese-made goods. U.S. business inventory reached an all-time high of $2.75 trillion in the quarter, according to the report.
The growth of e-commerce helped fuel modes such as motor carrier, intermodal, third-party logistics (3PL), air freight and freight forwarding, the report said. The U.S. same-day delivery segment, for example, is expected to grow 19.5 percent a year from 2018 through 2022, making it a $9.6 billion per year domestic business by 2022, the report predicted.
Caution signs in 2019
At mid-year, the report paints a picture of an economy and industry that could go either way during the second half. The economy’s momentum is slowing, trade tensions are still at the forefront, global economies are soft, and climate-related risks could materialize. On the other hand, trends such as e-commerce growth, lower fuel prices and technology-driven efficiency gains could bode well for logistics, the authors said.
Typically, logistics costs accounting for 8 percent of GDP would reflect an appropriate balance of strong demand and operational efficiency. During the report’s early years in the mid-1980s, logistics as a percentage of GDP would hit 15 percent. This indicated that supply chains were still inefficient and were still years away from being comfortable operating in a newly deregulated market and from information technology influencing business operations and processes. Not until the very early 1990s did the logistics cost-to-GDP ratio drop below 10 percent.
Efficiency gains could be offset, however, by uncertainty caused by the potential for an escalating trade war with China and higher fuel costs.
“The report listed fuel as a tailwind, but that was until last week when the Iranians decided to blowup some oil tankers, so that’s going to cause some uncertainty in the fuel and oil industries,” said Ken Braunbach, Vice President of Transportation for Walmart [NSYE: WMT] . Braunbach also pointed out that a “driver deficit” was not highlighted in the report.
“If you look the investments made in driver wages last year across the industry, it had a positive impact, but not enough to bring in the 50,000 drivers the industry needs. If the economy turns and demand increases, that could be an issue.”
Derek Leathers, President and CEO of Werner Enterprises [NASDAQ: WERN], said that despite the revenue gains in 2018, trucking continues to operate on very tight margins. “The cost of capital for the average carrier is clearly north of 10 percent, maybe 12-13 percent, yet average earnings are not covering that, so we still have work to do to find ways to take waste out.”
