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‘Banner Year’ for Economy Adds to Capacity Crunch

Volume 2, Issue 12
June 30th, 2014
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Capacity-CrunchAs the economic recovery appears to take hold and strengthen, the future looks bright for logistics service providers and their customers – assuming the capacity crunch in the warehouse, rail and trucking industries can be addressed.

This is one major conclusion drawn from the 2014 State of Logistics Report released June 17 in Washington, DC by the Council of Supply Chain Management Professionals, along with the views of a panel of shipper, transport and 3PL providers gathered to discuss the report at the press event.

Although the recovery went through some rough patches last year, “I believe that 2014 will be a banner year,” said economist Rosalyn Wilson, author of the report and senior business analyst with the Infrastructure National Business practice of Delcan Inc.

The overall economy performed weakly over the 2013 holiday season and the first quarter of this year largely due to extensive and extended bad winter weather, she admitted. “The health of the freight market is a solid indicator of the direction the economy is going. All indications are that freight will grow moderately for the rest of the year and the economy should follow suit.”

The numbers tell the story. Following a weak start in January, economic performance during first five months of 2014 has been the strongest since the the official end of the recession in 2009, she said. Since the beginning of the year, industrial production rose 9.5%, new orders were up 3.3% and freight shipments increased 13.1%.

In May shipment volume rose 1% to the highest level seen since 2011, and it was the third consecutive month that the number of shipments increased, Wilson pointed out.

Freight payments climbed 1.1% in May, setting a record high and were 11.2% higher than a year ago and up 77.7% since the recession’s official end in 2009.

Both the rail freight and trucking industries are experiencing capacity problems for different reasons. For trucking the new hours-of-service regulations are exacerbating an already growing shortage of qualified truck drivers.

For the railroads, easing of drought conditions boosted wheat shipments last year and corn shipments this year, while parts of the country like Texas are seeing an increased demand for coal, according to panel member Pat Ottensmeyer, Executive Vice President of Kansas City Southern.

With coal and grain making up the bulk of railroad traffic volumes and accounting for most of their profits, capacity has shrunk for intermodal traffic, even though it is the mode’s fastest growing business line. While this is happening, Class 1 railroads like KCS are investing massive amounts in capital spending to improve both their infrastructure and rolling stock, Ottensmeyer noted.

Panel member Richard J. Jackson, Executive Vice President of Mast Global Logistics, a subsidiary of Limited Brands Inc., said “significant parts of our supply chain are going slower,” including ocean shipping, which has become less reliable.

But trucking is where he has seen the biggest negative impact. “Over the past 12 to 18 months we have seen challenges surrounding both the availability and reliability of trucking service.”

As a result, Jackson said that his company and others are turning more to dedicated contract carriage to ensure their trucking needs will be met.

Marc Althen, President of Penske Logistics (sponsor of the CSCMP State of Logistics report), said his parent company, Penske Leasing, also has experienced an accelerating interest by shippers in contract carriage services over last year.

Althen also has seen the impact of the driver shortage firsthand. “At Penske if we could find 1,500 to 1,700 drivers I could put them to work right now.” The inability to put drivers in seats also has led the company to lease more trucks instead of buying them, he said.

In addition, Penske Logistics has seen a 40% increase in the year-to-year demand for 3PL warehouse management services, Althen said.

Based on the growth in freight demand and squeeze  on capacity, Wilson predicts that truck rates porbably will climb in the 5-8% range this year.

Other warehouse-based 3PLs report that in some areas the demand for warehouse space due to growth of both existing and new business is exceeding immediately available supply.

The State of Logistics report found that the cost of warehousing rose 5.6% in 2013. Industrial property vacancy rates were down almost a full percentage point from the previous year.

“Fourth quarter demand was particularly strong and reached the highest level on record,” Wilson noted.

Reatil inventories rose 6.2% year over year, and increased in every qurter during 2013. Wholesale inventories grew only 2.7%, mostly during the fourth quarter. Manufacturing inventories increased only 2.1% and have remained flat this year in spite of an upward trend in manufacturing.

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