Logistics industry at a crossroads

Logistics costs declined in 2016 for the first time since 2009, even as increasing e-commerce boosted demand for last-mile delivery services.

This is one of the key findings in the 28th annual State of Logistics Report produced by the Council of Supply Chain Management Professionals (CSCMP) in collaboration with global strategic management consulting firm, AT Kearney, as the author and researcher, and with Penske Logistics continuing in its longstanding role as presenter of the report.

The report includes: a focused narrative on the economic environment impacting logistics; insights from interviews with industry leaders, including shippers, carriers, and analysts; a spotlight on relevant trends; and a strategic point of view on the state of the industry.

“This highly anticipated report contains the statistics and industry insights that will not only help our members do their jobs better, but also better prepare them for the business demands ahead, in a very dynamic marketplace,” said Rick Blasgen, president and chief executive officer of CSCMP.

A mixed bag causes confusion

This year’s report shows the first decline in United States Business Logistics Costs (USBLC) since 2009, while the booming surging e-commerce sector propelled demand for parcel delivery services. Logistics costs fell across all three measures the report examines: transportation, inventory carrying costs and other costs. Overcapacity, weak volumes and rate pressures are blamed in many sectors, while parcel sector and warehousing costs grew, thanks to e-commerce.

The report also noted that fuel prices and logistics costs have become disconnected, where previously they operated in lock step. This is also attributed to the growth of ecommerce, with the report noting that consumers are now the driving force behind logistics spending.

The report’s analysis predicts that US economic growth will be strong in the near term, although climbing interest rates and an appreciating US dollar could increase the costs of doing business south of the border.

The report highlights the political uncertainty that is a hallmark of 2017 so far, influenced by President Donald Trump’s “mixed message of tax relief, regulatory reform, and trade restrictions.”

Meanwhile, mixed economic signals—high consumer confidence versus sluggish GDP growth—are making it difficult to determine which way the economy is going.

“The logistics industry appears destined for a prolonged bout of cognitive dissonance, coupling frustration over subpar growth with the optimism reflected in rising stock market values, technology investments and consumer confidence data,” the report says.

The report notes that in this uncertain environment businesses seem to be exercising caution in adding inventory. Likewise, demand for truck capacity is expected to fluctuate as businesses continue to adjust their outlook.

“Looking ahead, 2017 could be a pivotal year for logistics,” the report notes. “Demand patterns are shifting, technological advances are altering industry economics, and new competitors are challenging old business models. This year could bring significant moves that reshape individual sectors and even the industry as a whole. Major business combinations, large-scale shifts in distribution flows, deep capacity cuts, massive infrastructure investments—anything is possible.”

The report details the performance and outlook for each of the modal sectors as well as pipelines, freight forwarding and third-party logistics.

The digital shift

The report highlighted the coming shift to digital supply chains. “The next-generation supply chain will enhance fulfillment capabilities and drive efficiencies through technologies ranging from big data and predictive analytics to artificial intelligence and robotics. Inevitably winners and losers will emerge as companies that make the right technology investments and strategic choices will outperform others,” the report said.

We asked Marc Althen, president of Penske Logistics to comment on this significant shift. In an interview, Althen pointed out that technology is playing a huge role in the way logistics is being done, and this is influencing customer behaviour.

“There’s so much data being generated from all the various devices, so [the customers] want a provider to be able to capture the data and really analyze the vast amount of data and present it to them in a very easy format so that they can make data-driven decisions,” he said.

And with the increasing reliance on technology comes the increased peril of hacking. On the very day in June that many global logistics players were crippled by a ransomware attack, Althen commented on the critical importance of cyber security: “We don’t take shortcuts when it comes to IT security. It costs money, and we make sure we’re making the right investment to ensure our systems and our devices are secure.”

With the interconnectedness of the logistics provider and customer, this is not negotiable. Althen pointed to his company’s relationship with Ford, for example.

“We manage all of Ford Motor Company’s inbound material flow in North America. They have 35-plus manufacturing facilities located in North America. So we’re working with their teams, we’re taking all of the information that says these are the vehicles they’re going to be building in the next fifteen days, and we’ve got to orchestrate the material flow, the material movement into those plants,” he said.

“We cannot have any disruption in our supply chain because it would have a massive adverse effect on them.”

At a crossroads

The report posits four possible scenarios facing the logistics industry. The first is called “Plain Sailing”. In this future, regulation declines, creating a more open market and encouraging trade. Competition drives down costs and encourages logistics suppliers to innovate and adopt new technologies to enhance their competitive position. Shippers benefit through improved supply chain visibility and better efficiency.

The second scenario, “Choppy Waters”, envisions a more protectionist US that is focused on protecting and bolstering old-school domestic industries like steel. These industries have different logistics requirements from the consumer-centric models currently in play, creating a modal shift towards rail and away from import-centric ports and cross-border trucking. As carriers struggle to adapt, shippers are left bracing for interruptions in service. The report also suggests that in this world the ‘uberization’ of freight will become increasingly prevalent as a means of filling in the gaps as carrier networks adjust.

Future three, “Stemming the Tide”, sees the enactment of stronger regulations affecting the transportation industry, including stricter hours of service rules and lower emissions targets. This would be expected to increase costs and reduce levels of service for shippers. However, at the same time global trade volumes would be increasing, allowing carriers to invest in technology that would boost supply chain efficiencies. These would focus on ways to work the new regulatory environment, with a likely emphasis on driverless trucks and cleaner engines.

In the last scenario, “In the Doldrums”, a protectionist US coupled with poor economic conditions makes the business environment difficult for carriers and slows investment in technology. Price wars drive all but the strongest suppliers from the market, initiating a chain reaction where shippers at first benefit from lower prices, then suffer as capacity dries up and prices climb again.

Which of these futures might come to pass? Of course, the State of Logistics Report is no crystal ball, but it does offer the following counsel in times of flux: “The first step in dealing with such uncertainty is to identify the major forces at play and articulate the most extreme manifestations of each…A well-informed evaluation of strategic choice will become more important for companies charting routes to growth in a world accelerating toward a new era of uncertainty.”

The CSCMP 28th Annual State of Logistics Report is available for download on the AT Kearney website at: https://www.atkearney.com/transportation/cscmp-2017.