2017 State of
Logistics Report
Accelerating
into UncertaintyAccelerating into Uncertainty
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.
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