Over the last decade, consultants have preached the gospel of deploying high tech and collaboration to tackle cost and capacity issues. Now, under pressure from ecommerce, there is no choice for logistics providers and their customers but to get serious about it.
That was the conclusion of the 29th annual State of Logistics report from the Council of Supply Chain Management Professionals, prepared by the consulting firm of A.T. Kearney Inc. and financially underwritten for the past 10 years by the third-party warehouse and logistics provider Penske Logistics.
The report was presented at a press conference including a panel discussion by industry executives that was held June 19 in Washington, DC.
A major focus of this year’s report is the worsening capacity crisis facing shippers, particularly when it comes to trucking, which had seen overall industry capacity shrink during the Great Recession and is wrestling with a growing driver shortage.
“The demand-supply balance shifted much more dramatically this year when compared to last year,” explains Sean Monahan, A.T. Kearney partner and the report’s co-author.
“In 2015 it was a dark story if you were a carrier. There was a lot of excess capacity in the marketplace. We saw that starting to turn around in 2016 and continued to accelerate into 2017.”
Cost pressures are growing. Business logistics costs, in United States grew 6.2% in 2017, to 7.7% of GDP, compared to the 7.5% that had been reported for 2016.
Inventory carrying costs rose 4.6% over 2017, paced by a 5% gain in borrowing costs as interest rates climbed. Physical storage costs climbed 4.2% as demand grew for facilities needed to support ecommerce fulfillment, the report says.
“Retail and wholesale inventories are swelling, household spending is strengthening, and economists are predicting tax reform will add 70 basis points to GDP over the next decade,” according to the Kearney researchers.
Strong demand and higher interest rates lifted the cost of carrying inventory last year. Inventory financing expenses rose 5% as average capital costs increased 6 basis points, and storage expenditures increased 4.2%. This marks a sharp acceleration from 0.7% inventory cost growth in 2016.
One welcome development is the tax reform law that gives asset-heavy companies incentives to spend money on overdue capital improvements, including projects addressing the logistics industry’s last-mile challenge, they add.
Capacity constraints in trucking drove some of the highest supply chain cost increases, with a 7% rise in overall trucking costs. This included dealing with a 9.5% rise in private and dedicated trucking costs, 6.4% in the for-hire truckload and 6.6% in less- than-truckload segments. Don’t expect this to improve anytime soon. Both carriers and shippers cite the driver shortage as major, growing cause.
Meeting Warehouse Challenges
Among those who have benefited and are being challenged most by the ecommerce boom are 3PL warehouse operators, the researchers found.
The continued growth of ecommerce pushed parcel shipment volume up by 7% in 2017, to nearly $100 billion and is reshaping warehousing, which in many cases will be smaller and closer to large population centers.
Warehousing continues to experience strong demand, tighter capacity and rising rental rates. Labor costs are the biggest factor, with warehouse wages having risen 6% last year to reach a range of $12 to $15 an hour.
“As warehouse operators’ largest single expense was rising, worker productivity stagnated, delivering a one-two punch to operational efficiency and profit margins,” the report explains.
Customers seeking cost flexibility drove demand for “pop-up” warehouses, while warehouse operators turned to automation to address tight labor markets and higher volumes, the researchers find.
In addition, the industry needs to overcome its long- standing reluctance to invest heavily in technology, they assert. Robots, other automated systems, drones, wearables and chip/senor technology promise to help warehouses boost productivity, meet tight ecommerce lead times, and manage growing “safety stocks” and proliferating SKUs.
The report says the tax reform law’s five-year window for writing off the cost of new equipment and buildings should help. The immediate tax benefits and bonus deprecation on equipment are powerful incentives in the short term.
Researchers note that 3PL warehouse operators have a greater range of technologies to choose from. “The proliferation of choices at various price points means warehouse operators will find technologies suited to their needs and budgets,” they say.