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Logistics Growth Creates Challenges

Total logistics expenditures in the United States actually declined in 2016, but the disruption caused by ecommerce spurred growth in warehousing and parcel shipping.

After modest progress in 2015, logistics efficiency posted a sharper improvement last year. Logistics costs in the U.S. dropped 34 basis points as a percentage of nominal GDP, reaching levels not seen since the great recession of 2009–10.

Much of the decline can be traced to the precipitous drop in coal, oil and natural gas hauling by railroads, and competitive factors that helped control most trucking costs, especially in the truckload segment.

Those were among the conclusions of the 28th annual State of Logistics released by the Council of Supply Chain Management Professionals, sponsored by Penske Logistics and researched by the consulting firm of A.T. Kearney Inc.

For the first time in 28 years the researchers chose to separate out the third-party logistics warehouse industry for special attention and analysis.

In 2016 total business logistics costs fell 1.5%, year over year, to $1.392 trillion, after rising at a 4.6% compound annual rate from 2010 to 2015. Costs measured include transportation, inventory and a range of other costs.

The researchers noted that this is the second year in which overall spending on logistics dropped despite a rise in energy prices, 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 ecommerce deliveries.”

The power of ecommerce to reshape the nation’s supply chain is marked by that fact that although overall transportation costs fell by 0.7% last year, spending on package delivery services jumped by 10%.

Parcel and express delivery has surpassed railroads as the second-largest logistics sector behind freight trucking.

Meanwhile, energy-sensitive pipelines and railroads saw rates and volumes stall or drop as oil prices remained at historically low levels despite a price upturn in 2016.

Warehousing: Heart of the Supply Chain

Economic cross-currents also affected inventory carrying costs last year, the researchers said. As a result, storage expenditures rose 1.8% 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%. The researchers noted that a 54-basis-point drop in the weighted average cost of capital reduced inventory carrying costs by 3.2%.

Spending on public and private warehousing rose 1.8% to $1.44 billion last year, and forecasters see that enjoying annual growth of 3% through 2021.

In spite of this healthy situation, profit margins have not improved to more than 3-6% for 3PL warehouses because they remain under pressure from rising labor costs, the increasing need to invest in buildings and management systems, and persisting political uncertainty, the researchers said.

“The year ahead will challenge warehouse operators to navigate these trends while building holistic, flexible networks capable of providing the rapid order fulfillment today’s consumers have come to expect,” they stressed.

The researchers recognize that the financial demands required for developing sophisticated omnichannel systems, floor automation and seamless warehouse and transportation management systems are exerting great pressure on warehouse companies, which operate on slim margins, but are essential to future success.

“Automation and other advanced systems can ease the cost pressures that are squeezing warehouse margins and give operators the new capabilities they need,” the researchers added.

Looking to the Future

The writers of the report believe 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,” they said.

Logistics is seen moving toward a fully digital, connected, and flexible supply chain optimized for ecommerce 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,” they added.

“Inevitably, winners and losers will emerge as companies that make the right technology investments and strategic choices outperform others.”

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