DC Velocity - July 2017

newsworthy

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 service provider (3PL) 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 toward greater efficiency. 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 operate 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 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 trend may reverse itself by the time next year’s
report comes out. It is “not sustainable” for so many car-
riers 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, D.C., 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”