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Transport Watch: Itís a Sellerís Market for Logistics Providers
State of Logistics: Annual report of supply chain experts suggests price increases are here to stay as supply continues to be constrained. Report looks to trends and new technology that can radically change U.S. logistics over the next 5-10 years.

By Tim Cox
Date Posted: 8/1/2018

U.S. business logistics costs rose in 2017 after a decline the previous year, and it is a seller’s market for logistics providers, according to the 28th Annual State of Logistics Report®.

The pace of spending increases was especially pronounced in the fourth quarter, according to the report, which was authored by A.T. Kearney and presented by Penske Logistics. The report was issued recently by the Council of Supply Chain Management Professionals (CSCMP).

Business logistics costs were basically flat from 2011-15, at 7.9% of nominal Gross Domestic Product except climbing slightly to 8.0% in 2014. These costs declined to 7.6% in 2016 before last year’s uptick to 7.7% or $1,1494 billion.

The main drivers behind the turnaround are the strong economic climate, which is fueling growing demand, a strong job market and rising wages. Growing demand has intensified the shortage of truck drivers in the industry, although the challenge certainly is not new.

 “The demand-supply balance shifted much more dramatically this year when compared to last year,” explained Sean Monahan, A.T. Kearney partner and report co-author. “In 2015 it was a dark story if you were a carrier. There was a lot of excess capacity in the marketplace. We saw that starting to turn around in 2016 and continued to accelerate into 2017.”

Revved up demand has triggered freight capacity shortages that allowed carriers to raise prices after years of downward rate pressure. Other factors in the nation’s healthy economic growth are resurgent consumer spending and the anticipated benefits from federal tax cuts.

There are no signs that things are going to slow down in 2018. However, the outlook is somewhat clouded because of new tariffs and fears of trade wars with countries imposing retaliatory tariffs.

Increased capacity rates are leading to higher supply chain costs for businesses, and the consolidation of smaller trucking and logistics companies that cannot keep pace. Challenges are spurring high-level technological innovations. Rising fuel costs also are a factor.

The continued growth of e-commerce pushed parcel shipment volume up by 7% in 2017 to nearly $100 billion. It is expected to rise at similar levels for the next few years.

The growth of e-commerce is having a strong effect on the supply chain, notably the need for more warehousing, which in many cases will be smaller and closer to large population centers. Another effect: the development of more responsive and flexible logistics networks.

The continued double-digit growth of e-commerce also fueled other modes, namely motor carrier, rail, air freight, pipeline, freight forwarding and third-party logistics (3PL). All modes of transport have faced capacity issues, and shippers and carriers were forced to be more innovative.

The truck driver shortage continues and is intensifying. The result may be slower package delivery times for Americans, who are ordering more goods and services online by the day.

Toward the end of 2017, over the road (OTR) became so heated that a significant percent of shippers modified their approach to freight bids to reduce exposure, looking to dedicated carriage or curtailing lane bidding to secure capacity. Still, reports of 5–15% cost increases in 2017 OTR were widespread.

 “Developments in the second half of 2017 signaled that logistics executives face continuing capacity shortages and price increases, potentially complicated by trade tensions that could disrupt global supply chains,” the authors wrote. “That’s why we name this year’s report Steep Grade Ahead. For company leaders, striking the right balance between price and risk has never been more important—or more difficult. Shippers looking to control logistics costs need creative thinking and innovation, and that means opportunity for start-ups and new technologies offering novel solutions to transportation challenges.”

There are several technological innovations that may have a big impact on the supply chain in the next decade. They include ‘uberization’ of freight; blockchain; fully autonomous trucks; artificial intelligence applications; truck platooning; electric vehicle fleets; autonomous mobile robots; and drone and unmanned aerial vehicle delivery systems.

The report identified five trends expected to shape the future of logistics:

• Robust macroeconomic growth rooted in a strong labor market and recent tax cuts will boost demand for logistics.

• Rising interest rates, a tighter labor market, and higher fuel prices will raise logistics costs.

• Robust demand patterns and new competitors will challenge old business models.

• A fully digital, connected, and flexible supply chain optimized for e-commerce and last-mile, same-day delivery will become essential.

• The next-generation supply chain will improve fulfillment and drive efficiency through technologies such as big data and predictive analytics, artificial intelligence, robotics, crowdsourcing, and electric and autonomous vehicles.

Halfway through 2018, the report authors see signs of continued capacity constraints and sustained high prices. Unemployment is expected to remain low for the rest of the year, and consumer confidence is at its highest level since 2004. Retailers are confident about building larger inventories to meet demand, reflected by increases in both wholesale and retail inventories.

 “In light of these developments we expect pressures on capacity and pricing to intensify,” the authors wrote.

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State of Logistics