After Reaching Historic Lows, Logistics Costs Are Primed to Rise
Report says capacity in an improving economy will struggle to keep up with higher consumer, industrial demand
The new State of Logistics report says U.S. companies have kept inventory costs tamped down tightly since the 2008-2009 recession. PHOTO: BLOOMBERG NEWS
An era of historically low logistics costs may be coming to an end.
Costs for everything from hiring truck drivers to storing goods in warehouses are primed to rise, driven higher by an improving economy, reduced capacity and coming interest-rate increases, said Rosalyn Wilson, author of the Council of Supply Chain Management Professionals’ annual State of Logistics report.
The report, which measures the total transportation and logistics spending by U.S. companies, shows businesses have kept supply chain costs tamped down tightly since 2009 as the economy has moved forward in fits and starts. But the industry is about to pay for its lack of investment, as improving growth drives up demand for consumer goods, industrial equipment and other products. Shipping volumes will soar, and capacity will struggle to keep up, particularly in the trucking business, which already faces a driver shortage, Ms. Wilson said.
“We’re going to have a total massacre in freight pricing if demand rises in a serious way and the capacity remains where it is,” she said. Trucking companies will “raise rates 10% and more and more companies will follow suit…they don’t have a choice.”
Rising interest rates are likely to further raise costs in the logistics industry, analysts say. Later this year, the Federal Reserve is expected to increase its benchmark rate for the first time since 2006, raising borrowing costs throughout the economy. In the logistics business, higher rates will make it more costly to hold on to inventories for long periods and raise borrowing costs for equipment in the capital-intensive transportation industry, costs carriers are likely to pass along to shippers by raising prices.
Fed officials gave a median forecast for rates to reach 0.625% at the end of 2015 and 1.625% at the end of 2016. The gradual nature of the increase should keep the impact on inventory and capital costs muted, said Harold Friedman, senior vice president for sales and marketing at Data2Logistics Inc., a Princeton, N.J. company that processes freight payments. But eventually, financing costs will start to bite, he said.
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“For a long time, the cost of capital has been next to nothing for a lot of companies,” Mr. Friedman said. “But in the second half of next year, people are going to start to rethink the panacea that they’ve had for several years and ask, ‘what can I do about this?’”
The Council’s report released Tuesday said the inventory carrying rate—the ratio of the cost of holding inventory and the value of the inventory—reached a historic low of 19.1% in the aftermath of the recession and has remained there. Inventory costs as a share of GDP have remained between 2.6% and 2.8% of GDP since 2009 after hovering at more the 3% for several years before that.
Logistics spending was 8.3% of GDP in 2014, breaking a string of four straight years where it was 8.4% of GDP and far below the nearly-10% ratio in the early 2000s. Total spending on logistics—including inventory-carrying costs, warehousing and transportation—was nearly $1.45 trillion last year, up 3.1% from the year before and only about $30 billion more than companies spent on logistics in 2007, not adjusted for inflation.
Walter Kemmsies, chief economist at Moffat & Nichol Inc., a transportation engineering firm, said higher rates also will constrain companies’ ability to add warehouse space cost-effectively if the economy starts heating up.
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“Warehouse utilization rates are north of 95% right. When that’s the case, the warehouse managers begin to understand they’re not charging enough,” Mr. Kemmsies said.
Trucking rates also remain low even though capacity, by many accounts, has remained relatively tight this year. But Mark Baxa, senior vice president for global procurement at Monsanto Inc., said the national outlook doesn’t take into account a highly fragmented economic recovery around the country.
“Companies understand where capacity is available in their given markets. When prices aren’t increasing, it means companies have to be competitive and play by the laws of supply and demand,” said Mr. Baxa. “Today’s capacity is adequate to meet today’s demand
