DC Velocity - July 2019

newsworthy

IN THE FACE OF TIGHT TRANSPORTATION CAPACITY AND RISING freight rates, overall U.S. business logistics costs jumped 11. 4 percent in 2018 to a total of $1.64 trillion, or 8.0 percent of the U.S.’s $20.5 trillion gross domestic product (GDP), according to the Council of Supply Chain Management Professionals’ (CSCMP) 30th annual State of Logistics Report.

The report, which was released June 18 at the National Press Club in Washington, D.C., was written by the global management consulting firm A. T. Kearney and sponsored by logistics service provider Penske Logistics.

This year’s report found that all of the components of logistics spending—transportation costs, inventory-carrying costs, and other administrative costs—rose in 2018. Those findings echo the experience of many major companies, which have reported in their Securities and Exchange Commission (SEC) filings that they outspent their supply chain budgets in 2018.

The biggest increase occurred in the area of inventory-carrying costs, as companies responded to trade tensions between the U.S. and China by building up their inventories in advance of tariffs. Inventory levels rose 4. 6 percent year over year in 2018, and inventory-carrying costs rose 14. 8 percent. Meanwhile, transportation costs jumped 10. 4 percent, with every mode experiencing an increase.

The report attributes the rising logistics costs to four factors: continuing growth in e-commerce sales; extremely high utilization rates among existing truck fleets; government regulations on truck drivers’ “hours of service”; and the low unemployment rate among truck drivers and warehouse workers.

While logistics costs jumped in 2018, the report also said shippers can expect freight rates to ease somewhat in the coming year, due to softening growth in the latter part of 2019. It went on to note that adoption of new technologies and innovations, such as automated trucks and warehouses, vehicle electrification, and 5G wireless communication networks, could also help keep operational costs in check.

“[The logistics industry] has overcome a tough and exhausting year,” said Michael Zimmerman, partner with A. T. Kearney and co-author of the 2019 report. “Now, demand has softened, and growth is in doubt—but not to the point where a steep decline is visible, a context we summarize in the report’s title, ‘Cresting the Hill.’”

—Susan K. Lacefield

Business activity in the logistics sector continued to grow in May, although at a slower rate than in April and the year-ago period, according to the latest Logistics Manager’s Index (LMI) Report. The May LMI registered 56. 7, down from April’s reading of 57. 9 and down considerably from last May’s reading of 72. 6. The current reading is the lowest score in the index’s more than two-year history but still remains above the 50-point mark, an indication of continuing (albeit slowing) expansion in the sector, according to LMI researchers.

Researchers said transportation capacity expanded during the month and that transportation prices contracted for the first time in the LMI’s history, a combination that may signal softening demand. As LMI researcher Zac Rogers of Colorado State University explained, the Transportation Price Index has been the LMI’s highest-scoring metric, reaching 94 out of 100 last May, indicating that more people were seeing increases in transportation prices. This month, the price index dropped to 48, indicating a drop in freight rates.

“This is an abnormal level of change
for a 12-month period,” Rogers said.
“It coincides with [an] increase in
transportation capacity (more capaci-
ty = lower prices). This may be partial-
ly due to fleet expansion and there
being more trucks on the road, but
it’s also probably a result of softening
demand.”
The LMI is released each month
by researchers from Arizona State
University, Colorado State University,
the Rochester Institute of Technology,
Rutgers University, and the University
of Nevada, Reno, in conjunction
with the Council of Supply Chain
Management Professionals (CSCMP).