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The State of the Logistics Industry: Driver Shortage, Online Commerce, Export Growth Remain Key Trends, Slow Growth Is the New Normal
Logistics Report: Yearly analysis of the U.S. supply chain suggest the economy has reached a new normal of slow growth as inventories increase, truck driver shortages loom and e-e-commerce changes the logistics landscape.
By DeAnna Stephens Baker
Date Posted: 8/1/2013
The logistics industry is continuing to face many of the same problems that it was looking at a year ago, with trucking capacity being one of the biggest concerns. According to Rosalyn Wilson, a logistics consultant and author of the 2013 State of Logistics Report, current conditions are probably the “new normal” for the supply chain industry and the economy as a whole.
Released by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics, the report presents an overview of the economy during the past year, the logistics industry’s key trends and total U.S. logistics costs for 2012. The following is a review of some of the highlights of the report.
Trends in the near term will probably not be materially different than what has been seen for the last three years, according to Wilson. Although she believes that the economy and logistics sector will slowly regain sustainable momentum, she said to expect unevenness in growth rates and said she has seen no indicators that there will be any dramatic shifts anytime soon.
“The new normal is characterized by slow growth with Gross Domestic Product (GDP) growth hovering between 2.5-4%; higher unemployment levels and slower job creation; higher healthcare costs for businesses that will encourage extremely lean full-time staffs and a higher reliance on part-time workers who do not receive benefits; less reliable or predictable freight service as volumes rise, but capacity does not increase fast enough to fully meet demand; and longer shipping times for commodities moving by ocean,” said Wilson.
Total U.S. business logistics costs rose to $1.33 trillion last year, a 3.4% increase from 2011, but still remain at 8.5% of the GDP, according to the report. Transportation costs rose only 3.0% in 2012 due to weak and inconsistent shipment volumes and strong pressure to hold rates, Wilson said. For the second year in a row, there has not been much room for trucking and rail carriers to raise their rates to match their cost increases due to labor, fuel, and regulatory costs, according to Wilson.
“Capacity is a big factor impacting the industry in different ways, positively and negatively,” said Wilson. Truck capacity is still walking a fine line, with few shortages but industry-high utilization rates.”
The trucking industry has been maintaining a tenuous balance between supply and demand for several years, largely due to the shrinking pool of eligible drivers. That balance is expected to start being disturbed as the Federal Motor Carrier Safety’s (FMCSA) new hours of service (HOS) regulations just went into effect July 1, 2013. The productivity of existing drivers is expected to be reduced by between 2% and 10% by the HOS regulations, leading to a capacity contraction. Wilson reported that the industry is currently short by an estimated 30,000 drivers and the HOS regulations could result in a net reduction of 2% to 5% more, resulting in the need for a total of 100,000 new eligible drivers. This trend could soon make qualified drivers a valuable commodity.
Air, Ocean and Rail Sectors
In contrast to trucking’s capacity issues, the air cargo industry is dealing with overcapacity. The growth of cargo space in the bellies of passenger jets is putting significant pressure on all cargo jets, even with reductions in the number of cargo aircraft and total tonnage declined 2.2% in 2012.
Ocean carriers had a rough year, with demand falling off sharply around the globe, capacity jumping over 7%, and carriers engaging in a rate war early in the year followed by multiple attempted rate increases that did not stick. In an attempt to shore up rates, over 5% of the fleet was idled which led to some improvement partway through 2012.
The rail sector is in the best position in terms of capacity. Over 20% of railroad freight cars are still in storage, but the sector is in very good shape from an infrastructure, equipment, and personnel basis, Wilson said. This is because $13 billion was spent on improvements last year. The sector saw a higher increase in transportation costs at 4.9%, increasing rail revenue per ton-mile 5.3% to 3.96 cents. Wilson noted that competitive pressure from trucks in the intermodal market held rates down for this service. Intermodal volume was the second highest on record, while carload traffic declined 3.1%.
Growing inventory levels filled all available warehousing capacity in 2012, leading to an increase of 7.6% in warehousing costs. Record levels of inventory have accumulated throughout the supply chain, according to Wilson. And although new construction increased the available warehouse capacity, occupancy rates are climbing. All business inventories rose in all quarters of 2012 except for the second quarter, and despite historically low interest rates that have helped reduce costs, inventory carrying costs still increased 4.0% for the year. Wilson said that the explosion in online shopping has contributed significantly to a change in the way that inventory is managed and distributed.
Exports and Imports
Exports and imports last year saw slower growth than in 2011 but both still reached record high totals. Exports of goods and services increased by 4.6% in 2012, hitting $2.2 trillion, while imports rose 2.8% to $2.7 trillion. As a share of GDP, exports held steady from the 2011 record of 13.9%, but record levels of exports with over a dozen countries were reached. It is also a 39% increase from 2009, when President Obama called for U.S. exports to double. With a 10.1% in 2012, motor vehicles and parts was one of the leading manufacturing sectors for exports. The leading export categories were capital goods and industrial supplies.
Despite some modest improvements in the freight sectors, last year was not a great year for the overall economy or the logistics industry. So far, 2013 has continued to follow many of the same pattern of mixed economic signals and inconsistent performance that have been seen for the past couple years. Housing, unemployment rates, manufacturing and consumer confidence have all alternately inched up and fallen back down again, causing many to suggest that the U.S. economy is still slowly on its way to a recovery. Wilson suggests differently.
“These are the same trends we have contended with for the last three years and they will be with us for at least the next three, so perhaps it is time to consider that we have ‘recovered,’ but things are different now,” said Wilson.
According to Marc Althen, president of Penske Logistics, the report reveals opportunities currently available to logistics service providers. He said that U.S. shippers spend over $1 trillion to manage their supply chains, but companies like Penske Logistics are only capturing a little over $141 billion of that, creating tremendous opportunities for logistics service providers to provide services that are in demand.
“We see more shippers continuing to outsource various elements of their supply chains to logistics providers to further reduce warehousing, trucking and shipping costs while improving service levels,” said Althen.
Pallet companies interested in exploring new markets or expanding their existing logistics services should consider this possibility. With an ever-growing focus on making supply chains as lean as possible, being able to offer existing as well as new customers these types of services while helping them reduce costs could be a profitable opportunity.
For more information on the State of Logistics Report, or the CSCMP, visit http://www.cscmp.com.