The 28th annual Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report reveals an industry buffeted by crosswinds as the pace of change accelerates, a state of affairs we refer to as Accelerating into Uncertainty. The data and analysis in this report offers useful insights to help shippers and carriers plan their business strategy for 2017 and beyond.
The global economy emerged from a sluggish 2016 poised for faster growth. The International Monetary Fund predicted 3.5 percent worldwide growth in 2017, and burgeoning consumer and business confidence augured well for logistics demand across a range of sectors.
Expectations collided with reality early this year, when US GDP rose an underwhelming 1.2 percent in the first quarter—ahead of last year’s 0.8 percent but only the fourth-fastest first quarter in the last six years. The disconnect was the latest unsettling discrepancy between soft indicators of sentiment and hard data on actual economic activity.
The conflicting signals leave shippers and logistics providers with little clarity on economic fundamentals for the remainder of 2017. Further complicating the outlook are variables such as currency exchange levels, interest rates, and political trends. Against that uncertain backdrop, executives must make vital decisions about capacity, pricing, technology deployment, and strategy.
Along with lackluster economic growth last year came the first decline in USBL since 2009 (see figure 1). United States business logistics costs (USBLC) dropped 1.5 percent in 2016 after rising at a 4.6 percent compound annual rate from 2010 to 2015. Costs fell across all three USBLC components: transportation, inventory, and other costs. The declines reflect overcapacity, slack volumes, and rate pressures in several sectors, even as demand and prices rose in others.
Notably, overall spending on logistics dropped despite a rise in energy prices. This marks the second straight year in which the two have moved in opposite directions, indicating energy prices are no longer the primary factor in logistics costs. We suggested last year that consumers have become the driving force behind logistics spending, and this year’s results confirm the powerful impact of rising consumer demand for e-commerce deliveries.
While overall transportation costs fell 0.7 percent last year, spending on package delivery services jumped 10 percent. Parcel and express delivery has surpassed railroads as the second-largest logistics sector behind motor freight. Meanwhile, energy-sensitive pipelines and railroads saw rates and volumes stall or drop as oil prices remained at historically low levels despite the upturn in 2016.
Cross-currents also affected inventory carrying costs last year. Storage expenditures rose 1.8 percent and are now as important as the financial carrying cost of inventory. Until last year, storage costs grew at a compound annual rate of 4.7 percent. Nevertheless, a 54-basis-point drop in weighted average cost of capital pulled down overall inventory carrying costs by 3.17 percent.
After modest progress in 2015, logistics efficiency posted a sharper improvement last year. USBLC dropped 34 basis points as a percentage of nominal GDP, reaching levels not seen since the great recession of 2009–2010 (see figure 2).
During 2016, a few common trends drove the action across various logistics sectors. Overcapacity and rate pressures fueled cost-cutting and consolidation, particularly among motor carriers and ocean freight companies. Cutting-edge technologies brought new efficiencies to sectors such as warehousing, parcel delivery, and motor freight. Along with technological advances came new business models in third-party logistics (3PL), freight forwarding, and rail, among others. Parcel carriers and warehouses capitalized on surging e-commerce volumes to raise rates and continued reconfiguring their networks to meet consumer expectations for faster delivery.
Looking ahead, 2017 could be a pivotal year for logistics. 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.
As company leaders weigh options in a fast-changing business environment, they also face increasing political risk. Rising protectionist sentiment around the world threatens to constrict global trade flows, the lifeblood of logistics. Trump won the US presidency with a mixed message of tax relief, regulatory reform, and trade restrictions. His agenda could cut both ways for logistics, and it’s still not clear which Trump proposals will become law.
Beyond 2017, logistics is moving toward a fully digital, connected, and flexible supply chain optimized for e-commerce and last-mile, last-minute delivery. 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 outperform others. The industry must also reckon with the social cost of rapid technological evolution as automation tempers employment growth or eliminates hundreds of thousands of traditional jobs in warehouses, trucking, and other sectors.
We foresee four potential scenarios for logistics in coming years. We call the first plain sailing, as regulatory constraints recede, global trade flourishes, and technology improves efficiency. Under a choppy waters scenario, new policies favoring US manufacturing force shippers and logistics companies to adapt, spurring faster adoption of technologies. A stemming the tide scenario brings tighter regulations that increase operating expenses and accelerate investment in cost-saving technologies. The worst case puts logistics in the doldrums as regulatory costs rise and tough economic conditions deter technology investments.
Although some scenarios may seem more likely than others, successful companies will prepare to thrive under all four.