U.S. businesses see logistics costs rise, spending slow

Logistics costs for U.S. businesses rose 2.6 percent in 2015, while the largest component of logistics costs, transportation, grew only 1.3 percent during the year, according to a report from the Council of Supply Chain Management Professionals.    Logistics costs for U.S. businesses grew 2.6 percent to $1.4 trillion in 2015, but spending actually slowed by almost half from the 5.1 percent compound average rate over the previous five years and was flat relative to the overall economy, according to a new and improved “State of Logistics Report” from the Council of Supply Chain Management Professionals (CSCMP).
   As a percentage of Gross Domestic Product, logistics costs remained flat at about 7.9 percent. Logistics costs have stayed within a narrow range between 7.5 percent and 8 percent since 2010, after dropping in 2009 because of the recession.
   The dramatic lowering of double-digit logistics costs compared to the size of the economy over the past quarter century is largely a function of progress in more efficient supply chain management and freight transportation by industry, but the steady-state of spending in 2015 also reflected changes in the U.S. energy sector, the boom in e-commerce and lower inventory holding, the 27th edition of the report said.
   The biggest component of logistics costs – transportation – only grew 1.3 percent in 2015. Freight railroads, for example, experienced a 2.5 percent reduction in overall rail volumes, driven by a 14 percent drop in coal carloads as utilities accelerated the use of natural gas for market reasons – gas is now abundant and cheaper due to advances in hydraulic fracking – and to meet stricter Obama administration emissions regulations on coal-fired power plants. The slump in global oil prices also led to a decline in oil-by-rail shipments from new shale oil fields and to a drop in pipeline revenues. Meanwhile, the plunge in oil prices to below $50 a barrel earlier this year has resulted in lower fuel costs. In addition, lower oil prices reduced the need for carriers to impose fuel surcharges, which often built in an extra margin for efficient carriers, according to the report.

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Source: A.T. Kearney/CSCMP
   Trucking, the largest transportation sector, grew 2.6 percent to $583 billion in revenue, compared to 5.9 percent average growth in the prior five-year period. Truckload, which represents nearly half of the market, experienced a dramatic reduction in rates due to severe overcapacity. Penske Logistics, which sponsored the report, estimates there are 80,000 excess tractors operating beyond needed demand in the United States and Canada, President Marc Althen said during a panel discussion in Washington, D.C., coinciding with the report’s release.
   Inventory levels also flattened (0.2 percent increase) after steadily rising about 5 percent per year between 2009 and 2014, but total inventory carrying costs jumped 5.1 percent because of a rise in weighted average cost of capital (.42 percent). A contributing factor to holding inventory were higher interest rates.
   CSCMP this year selected consulting firm A.T. Kearney to author the report, which previously was produced by Rosalyn Wilson, to bring a fresh look to the study. The A.T. Kearney team, led by Sean Monahan, reorganized the report’s structure and expanded or replaced sources of data to enable more precise analysis of logistics activity in the United States.
   Based on its new methodology, A.T. Kearney has recalculated business logistics costs for the past 10 years. A.T. Kearney’s estimates are about four-tenths of a point less per year than Wilson’s were, although the trend is the same. A.T. Kearney estimated business logistics costs as 7. 9 percent in 2014 compared to Wilson’s figure of 8.3 percent.
   Here is how the two reports compare between 2009 and 2013:

  Previous New

2013 8.25 7.9
2012 8.24 7.9
2011        8.27 7.9
2010 8.10 7.5
2009 7.6 7.4


  The new report, for example, includes natural gas in the pipeline category for the first time, takes pains to accurately represent freight forwarding costs based on net revenues to avoid double-counting pass through of purchased transportation costs, and breaks out the cost of inventory into various sub-categories to calculate the weighted cost of capital.
   Wilson relied on the Federal Reserve’s cost of paper and estimated inventory carrying costs by multiplying the total value of business inventories by a fixed percentage, from which the subcomponents, such as financial and obsolescence costs, were estimated afterward.
   The new authors also adjusted the trucking categories from intercity and inner city to the actual modes: full truckload, less-than-truckload and parcel. The parcel sector is included in the report for the first time.