Logistics costs were on the rise throughout 2018, increasing 11.4 percent to reach $1.64 trillion, or 8 percent of gross domestic product, with expenses increasing across all sectors, including transportation and inventory carrying costs. However, for shippers to manage their transportation spend while also meeting heightened customer demands for convenience and managing complex shipping operations, it has increased demand for third-party logistics providers. As a result, the 3PL industry is expected to grow.
"Shippers increasingly need 3PLs to help solve their challenges of talent acquisition, visibility, capacity assurance and cost productivity," said Michael Zimmerman, a partner with the global strategic management consulting firm A.T. Kearney and lead author of the 30th Annual State of Logistics Report. "We foresee that demand for 3PLs will about double the pace of GDP growth at 5.2 percent between 2018 and 2022."
The 30th Annual State of Logistics Report was introduced by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics on June 18.
"More and more shippers are turning to us to help them overcome cost pressures they encountered last year," said Mark Althen, president of Penske Logistics. "We do feel some shippers are looking to us more as a partner."
Althen shared his thoughts during a panel discussion at the National Press Club in Washington, D.C., following the report's release. Steve Bobb, executive vice president/chief marketing officer for BNSF Railway; Ken Braunbach, vice president U.S. transportation for Walmart; Jill Donoghue, vice president of supply chain for Bumble Bee Seafoods; and Derek Leathers, president and CEO of Werner Enterprises, joined in the panel.
"It feels like after last year we're truly coming together to collaborate," Donoghue said. "It's no longer about 'you have to reduce rates,' it's more about working together to be more efficient so that both [shippers and carriers] make decent margins."
The State of Logistics Report found rising costs across all segments of the industry, and Zimmerman said 2018 was among the most challenging of years for shippers. Inventory led the way with a 13.2 percent overall cost increase on a 4.6 percent rise in year-over-year inventories as trade tension buildups met declining demand.
Tight capacity has led to significant and in some cases multiple rate increases. Transportation costs saw a 10.4 percent increase, but certain modes saw big jumps, according to the report. Zimmerman noted that freight rates were up across the board in the most inflationary year for logistics costs in the last decade. The increase in motor carriers was most pronounced in private fleets with a 13.1 percent increase, but the full truckload spike was high as well at 7.6 percent over 2018, Zimmerman said.
Fortunately for shippers, the report said, rates peaked in the middle of 2018 and are beginning to decrease toward more normal levels.
"The cost of capital for the average carrier is clearly north of 10 percent, maybe 12-13 percent, yet average earnings are not covering that, so we still have work to do to find ways to take waste out," Leathers said.
Labor costs remain a challenge, and growing demand led to a strong job market and rising wages for truck drivers as well as warehouse workers. Carriers and warehouses passed costs on to shippers as higher prices, the report said. Attracting and retaining labor remains one of the biggest challenges in logistics.
Zimmerman said cost pressures and last-mile challenges are creating increased demand for logistics solutions and elevating some providers to a more strategic role. "As the report relates, the 3PLs that bring the most dependability, innovation and productivity to their shippers will be the ones in the winner's circle," he said.
Zimmerman said 3PLs can help shippers meet the challenges they're facing, which vary by sector.
For example, consumer goods are increasingly moving to faster deliveries, which means forward inventory deployment and agility in omnichannel, including the handling of returns. For the industrial market, the demands of regulation and raw material supply add costs and volatility to their supply chains, and they increasingly rely on 3PLs to help them solve the problems, Zimmerman said.
The final mile remains a challenge, and Zimmerman said parcel and last-mile services are struggling with costly challenges. According to the report, online purchasing increased by 14.2 percent in 2018, and fulfillment costs for those types of orders are higher.
The increased number of residential deliveries are resulting in routes that are getting longer and less efficient. The variability in volumes, such as those seen during the Thanksgiving to Christmas window, create a surge that providers have to manage. In addition, volume profiles are changing as e-commerce expands to large and irregular shaped items, such as mattresses and patio furniture, that require special handling.
Amazon has continued to raise customers' expectations for compressed delivery windows, and more and more customers are demanding same-day, two-hour or even one-hour delivery. The report said same-day delivery is now approximately a $1 billion industry and it is the fastest-growing service type for e-commerce deliveries.
Rising demand and higher expectations from shippers increase the pressure on 3PLs to solve shippers' challenges. "3PLs usually have more resources and experience in logistics than do shippers," Zimmerman said.
Althen said the pace of change within the supply chain is continuing to increase, and shippers and carriers need to think about how they will collaborate and work together to adapt to rapidly changing conditions. "Third-party logistics providers are in the ideal position to provide the innovation, flexibility and efficiencies shippers need going forward," he said.