29th Annual State of Logistics Report: Carriers take the wheel

As if higher rates and capacity shortages weren’t enough to worry about, shippers must now deal with a pending trade war, import/export uncertainties and increasing scrutiny from C-suite executives. Shippers now face a steep climb to keep budgets and service levels intact.

By LM Staff · July 9, 2018

As most U.S. shippers can tell from their rising freight bills, carriers have taken advantage of a seller’s market in transportation as the confluence of a strong economy, surging demand and labor and capacity shortages are causing multiple pain points for logistics operations.

That’s the conclusion of the “29th Annual State of Logistics Report” produced by A.T. Kearney in partnership with the Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics. The report was released June 19 at the National Press Club in Washington.

The tightening logistics market, especially in ground transportation, is going to require “creative thinking and innovation” on the part of shippers, the report states, and new technologies and start-ups might provide some “novel solutions to transportation challenges.” However, old-fashioned ingenuity, building relationships with carriers and an increasing knowledge base of best practices may help logisticians ride out the challenges longer term.

Titled “Steep Grade Ahead,” this year’s report discloses that U.S. business logistics costs, after declining in 2016 for the first time since 2009, were on the rise again in 2017. Business logistics costs rose 6.2% to $1.494 trillion last year. However, the pace of spending increases surged in the fourth quarter of last year, perhaps foreshadowing more of the same for 2018.

The main rising cost drivers were the “robust” economic climate coupled with growing demand, a strong job market, rising wages and the truck driver shortage that’s now estimated by the American Trucking Associations to be more than 50,000. The State of Logistics report, while noting the driver shortage is “nothing new to the industry,” states that the shortage is contributing to sharply higher pay that is eventually being reflected in higher shipping rates.

With GDP rising a healthy 2.9% last year, business logistics costs increased 10 basis points last year to 7.7% of GDP, up slightly from 7.6% in 2016. As the report authors conclude, that’s still a bargain by long-term standards. By comparison, in 1979, the last year before trucking was economically deregulated, logistics costs were approximately 19% of GDP—a sure sign that trucking was perhaps the ideal industry to be unshackled from federal economic regulation.

The recently enacted tax cut for some upper- and middle-income Americans is expected to add 0.7% to GDP this year. However, the report noted that some of those gains could be erased by the Trump administration’s fascination with tariffs on exports, specifically aluminum and steel, and the threat to international trade agreements.

Mode by mode: Costs rising

Tightening capacity is only one factor behind the rising costs of freight movement. A country’s transportation system is only as good as its infrastructure, and the report makes clear that logistics operations will pay a price for long-delayed improvements to modernization of the U.S. network of roads, bridges, ports and airports.

That lack of any expansion of infrastructure spending is also expected to be a drag on productivity in the United States. The World Economic Forum’s “Global Competitiveness” report recently graded the United States a score of 5.9 on overall infrastructure quality—behind the Netherlands at 6.2, but ahead of Spain at 5.5.

“Logistics providers should not expect a sweeping modernization of U.S. infrastructure,” say the authors of the State of Logistics. “Modest upgrades in road, rail and airport infrastructure are likely in the near or medium term. As improvement projects move forward, logistics providers would face delays on affected routes.”

According to the American Society of Civil Engineers, the United States needs to invest $4.6 trillion in roads, bridges, ports and other infrastructure to bring the system up to grade. President Donald J. Trump has often touted an alleged $1.5 trillion, 10-year infrastructure plan that has gone exactly nowhere in Washington. The last plan was for a modest $200 billion federal spending plan, but even that is on a road to nowhere in this election year.

Speaking of dollars, freight transportation costs rose 7% last year compared with 2016. The State of Logistics Report breaks out the modal price rises:

  • private or dedicated trucking set the pace with a 9.5% increase;
  • less-than-truckload pricing rose 6.6%, while full truckload rates were up 6.4%;
  • trucking overall remained the dominant mode of freight transport, garnering $641 billion of the $965 billion total of freight transport bill;
  • the $99 billion parcel industry enjoyed a 7% rate gain, mostly as a result of e-commerce traffic;
  • the $21.4 billion intermodal industry chalked up 10.7% year-over-over gains;
  • the $80.5 billion rail sector had an 8.2% rate gain;
  • the $67 billion airfreight sector, dogged by overcapacity and skimming by the trucking industry, had a small 3.1% year-over-year gain;
  • the $41 billion maritime industry eked out a 1.1% rate gain;
  • the $36 billion pipeline sector rose 5.8%; and
  • inventory storage and financial costs rose a total of 4.6%, with administration costs rising a similar 4.9%.

Several shippers and carriers on the panel at the State of Logistics press briefing were queried about how they were handling the new pricing environment. Sylvia Fouhy, vice president of customer experience at Johnson & Johnson, says that capacity constraints are causing her company “to look at transportation as an investment rather than a cost of operations.”

Another member of the shipper panel, Cheryl Capps, vice president of global supply chain at Corning International, said that the capacity situation “has definitely kept us on our toes,” adding that “so far, capacity issues have been a nuisance” for 167-year-old Corning, but nothing more.

Those shippers using surface transport were likely to have the most headaches, as the combination of rising carrier costs and tight capacity caused “sharp” rate increases over 2017 and into 2018. “No sector saw more change last year than motor freight,” the report notes. “Severe capacity pressures sparked sharp rate hikes, and carriers gained pricing power as demand rose and electronic logging devices [ELD]exacerbated driver shortages.”

According to Joe Carlier, senior vice president for global sales a Penske Logistics and a member of the panel, says that his company is definitely feeling the capacity situation, noting that the average age of a truck driver is between 53 and 55 and that the newly enacted ELD rules will also add stress to the system.

“Everything is about people, people, people,” notes Carlier. “Something needs to happen here in the short term. At the end of the day, things desperately have to change.”

Carlier says that developing set schedules for drivers, using relay routes and changing delivery design systems to get drivers home more frequently are keys to fighting the driver shortage. “The ratio of those exiting the business against those entering the business is significantly unbalanced,” he says.

And as trucking challenges and rates rose, rail was able to “raise prices sharply,” the report states, reversing a decline seen in 2016 rail pricing. Productivity improved among the Class 1 railroads with the report noting that some rails embraced what it called “precision railroading” principles.

In the meantime, while international trade accounts for 27% of U.S. GDP—including $1.6 trillion in exports and $2.4 trillion in imports—such rising demand can’t be taken for granted. Trump has talked openly about opening a trade war with China and our allies, and that war is apparently under way, with tariffs on aluminum and steel and the retaliatory tariffs already starting.

“It’s far from certain that strong global trade flows will continue,” the report authors note. “U.S. trade policy has become less predictable as the current administration threatens established trade relationships in an effort to promote ‘reciprocal’ trade with better terms for U.S. companies.”

And in a dire warning directly to international traders, the authors believe that “the industry should prepare risk mitigation plans and consider raising rates or other strategies to protect profit margins as declining international shipments reduce revenue.”

Future trends defined

Analyzing what happened last year appears easy compared to predicting what may lie ahead. However, the SoL report concludes with five trends shaping the future of logistics:

  • robust macroeconomic growth rooted in a strong labor market and corporate tax cuts will boost logistics demand;
  • rising interest rates, tight labor and higher fuel prices will raise logistics costs;
  • strong demand patterns and new competitors will challenge old business models;
  • a fully digital, connected and flexible supply chain will optimize demand for e-commerce, while same-day delivery will become “essential;” and
  • next-generation supply chain will drive efficiencies through Big data-type technologies—predictive analytics, artificial intelligence, robotics and electric or autonomous vehicles will assist these efficiencies.

“Carriers are in control as demand outstrips supply while shippers try to ‘create capacity’ by improving efficiency wherever possible,” contend the authors. “Paradoxically, rising e-commerce volumes will shift attention to the supply chain from digital initiatives.”

And in a stern warning emphasizing the benefits of an efficient supply chain to the bottom line, the report concludes that companies “that recognize and capitalize on this trend will succeed, with smart technology investments and astute strategic choices separating winners from losers.”

Panelist reaction

The panel at the “29th Annual State of Logistics Report” press event was generally in agreement that logistics professionals are entering a new era in managing their logistics and supply chain operations.

Johnson & Johnson’s Fouhy notes that entering into long-term relationships with carriers and third party logistics (3PL) partners is now imperative to gaining improved logistics efficiency. “And that is a paradigm shift for us,” she says. “We strive to be the shipper of choice for our carriers because we’re not in it for the short haul.”

And while admitting that there can be tension with third-party relationships, Fouhy says that the key is getting 3PLs to fully understand her company’s needs and standards. “What we focus on is integrating J&J into the 3PL relationship to help alleviate tensions.”

Joseph Ruddy, chief innovation officer for the Port of Virginia, says that his organization has invested $750 million to enable the state’s six ports to handle as many as 1 million additional intermodal containers to help with the capacity flow. “The biggest concern we have is to continue to create that capacity,” he said, noting he was worried some for-hire trucking companies might be hiring away drivers from ports. “That might cannibalize some of our port capacity,” he said.

New technologies coming online could be at least a temporary balm to help shippers lower their costs and become more efficient, several panel members noted. Eric Hansen, Kansas City Southern’s vice president for intermodal, says that new digital standards such as blockchain technology hosting standardized, process-driven information in a digital environment might be a long-term boost to efficiency. “It’s imminent,” says Hansen. “We’re talking months, not years.”

– John D. Schulz, contributing editor