A robust economic climate, growth within e-commerce, tight carrier capacity and increasing demand for value-added warehousing services have positioned the third-party logistics (3PL) market for rapid growth throughout 2019.
In 2017, revenues reached $175 billion, and the U.S. market is expected to grow at about 5.5 percent through 2019 to reach a size of $195 billion. At the same time, U.S. business logistics costs increased 6.2 percent year-over-year, and U.S. business logistics costs as a percentage of GDP increased to 7.7 percent. At the midpoint of 2018, the industry is seeing signs of continued capacity constraints and sustained high prices.
These findings are part of the 29th Annual State of Logistics Report® (2018-19), which was introduced by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics on June 19, 2018.
The year’s most significant outcome was rising rates, with spot rates increasing about 30 percent and contract rates increasing between 5 and 15 percent, said Sean Monahan, a partner with the global strategic management consulting firm A.T. Kearney and lead author of the study.
While there were rising logistics costs across all components (transportation, inventory carrying costs and other expenses), transportation led the way with a 7 percent overall increase, with costs running well above inflation for every shipping mode except waterborne freight. Private or dedicated fleet and rail saw the biggest hikes as shippers scrambled to lock up capacity.
“The economy is doing well, and all modes are reaping the benefits from that,” Monahan said. “That is particularly true when we look at truckload, which for several years had been under a lot of pressure, facing excess capacity, a greatly reduced rate and a stagnant economy. Now that is inverted. We have capacity shortages, a strong economy, and rates are on the rise.”
Strong demand and higher interest rates also lifted the cost of carrying inventory last year. Inventory financing expenses rose 5 percent as average capital costs increased six basis points, and storage expenditures increased 4.2 percent. These figures mark a sharp acceleration from 0.7 percent inventory cost growth in 2016.
Monahan said the combination of rising freight demand and constrained capacity has escalated trucking to a C-suite hot button. “Some of the largest Fortune 500 companies in America highlighted the challenges in recent earnings reports, including household names Hershey’s, Mondelez, Mattel and Michelin, among others,” Monahan wrote in the report.
Joe Carlier, senior vice president of sales for Penske Logistics, took part in a panel discussion following the survey’s release. He said today’s supply chain forces logistics providers to be very fluid and move quickly. “The key to better supply chains is for 3PLs to collaborate with companies and become more of a trusted adviser,” he said.
The sustained growth of e-commerce continues to alter the supply chain. According to the U.S. Census Bureau, on an adjusted basis, the estimate of 2017 U.S. total retail sales was $5.1 trillion, of which $448.3 billion was e-commerce. E-commerce pushed parcel shipment volume up by 28 percent in 2017, to $96 billion, and forecasts indicate another 20 percent increase by the end of 2018.
Supply chain experts are focusing on solutions that make the last mile more efficient, such as click-and-collect technology, crowdsourcing deliveries and pickup lockers. Monahan said growing demand, rising expectations and increasing costs are forcing shippers to rethink that last mile in the supply chain, creating the potential for new players to enter the market.
What’s more, large e-commerce companies that have focused on generating demand through their websites are now fulfilling their own orders, taking on supply chain and logistics functions previously outsourced to third parties. The report said about one-third of companies are actively pursuing this direct-to-consumer strategy, another third are considering it, and the rest are waiting.
Monahan estimates that rates will continue to be elevated for the foreseeable future, at least until 2020, because the power rests with the carrier. “Barring a sharp, sudden economic slowdown, carriers will hold the upper hand over shippers for at least the next few years,” he said in the report. “The trucking capacity crunch is unlikely to ease soon, as driver shortages continue to block industry expansion.”
To help combat costs, carriers are turning to technology to increase visibility, identify profitable lanes and shippers, and maximize backhaul matching.
Shippers also are trying to be more efficient as they deal with the rising costs of services and shipping goods. “Brand companies that operate their own e-commerce are increasing the number of distribution centers they use. That way they can ship more standard freight versus expedited freight,” Monahan said, adding that shippers are also getting much more in tune with using zone skipping.
Monahan suggests shippers focus on building the most resilient and attractive supply chains to attract and retain carrier capacity at the lowest costs. Similarly, carriers should focus on building and retaining a robust customer base capable of delivering strong network densities and minimizing capacity losses.
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