In 2019, all businesses are part of a global infrastructure. Manufacturing is dispersed around the world. Shipping is advanced enough that ordering a component from Vietnam feels a lot like ordering it from Virginia. When we purchase a recommended product on Amazon, it could be shipped from a warehouse in China or Colorado, and we may not be able to tell the difference.
Logistics — the movement of products in a timely, safe and efficient way — is key to making the global supply chain work effectively. That customers can’t tell where parcel shipments originated is proof of good supply chain management.
In 2018, U.S. spending on logistics services reached its highest level since 2014. The costs of intermodal truck-rail transport and storage drove some of that increase as trucking and warehouse labor costs rose and companies invested in inventory increases to get ahead of new tariffs.
Logistics Spending Accounted for 8% of GDP in 2018
According to the annual State of Logistics Report from the Council of Supply Chain Management Professionals, released in June, U.S. companies spent $1.64 trillion on logistics in 2018, up more than 11% from the previous year. That accounts for about 8% of gross domestic product, up from 7.5% in 2017.
Logistics includes spending on transportation, inventory carrying costs, and other shipping-related expenses.
Transportation spending grew 10.4% in 2018. Spending on intermodal truck-rail transport spiked 28.7% year-over-year.
Storage and inventory costs accounted for a significant share of spending growth, rising 14.8% in 2018. This category could include capital construction, space rental, property tax, warehouse labor, inventory expansion and more. But inventory expansion can only account for a fraction of that growth: Inventories measured by value increased 4.6% year-over-year.
The Wall Street Journal’s analysis quotes figures from the U.S. Department of Commerce that show the inventory-to-sales ratio for all U.S. businesses at around 1.39 in spring 2019, up from a three-year low of 1.34 in May and June of 2018.
The writer attributes some of that to U.S.-China trade tensions: “Retailers, manufacturers and wholesalers pulled shipments forward in late 2018 in anticipation of rising levies on Chinese imports. That jammed warehouses and strained logistics capacity around major U.S. trans-Pacific gateways.”
That spike in inventory levels could account for the 2018 increase in storage costs. If tariffs were indeed the cause, then going into 2019, retailers and manufacturers are likely to need less shipping support early in their supply chains. Demand in the logistics sector may shift to retail and customer-service needs.
In 2018, “booming demand and tight capacity strained supply-chain budgets,” WSJ reported.
Although business was booming for carriers, Supply Chain Dive reported that 2018 was a tough year for them too. For more than 100 consecutive months, the unemployment rate has dropped, driving wages higher and making it harder to find workers. Trucking and warehousing felt those impacts acutely.
“You really saw shippers, as I said, and as the report observes, have the worst year of their careers,” Michael Zimmerman, a partner at A.T. Kearney and an author of the report, told Supply Chain Dive. Shippers were “scrambling for capacity, they were paying much higher rates, they were blowing up their budgets,” Zimmerman said.
Looking ahead, WSJ reports that economic growth is expected to slow for the rest of 2019, which means “companies that built up inventories ahead of expected tariffs could pull back their demand for logistics services this year.”
Reduced demand for third-party logistics means falling volumes for carriers, which could lead to stable or even reduced shipping prices. A.T. Kearney Inc. expects contract pricing for truck shipments will fall in 2019 by 3% to 5%.
Why are Logistics so Important?
Logistics services make it possible for companies to operate global supply chains. Because we can ship items on ships, airplanes, truck beds and, in some markets, robots, we can manufacture products with parts from all over the world and distribute them to customers all over the world.
Companies that invest in logistics are able to be nimble and efficient. In 2018, when the Trump administration announced new tariffs against several nations, companies with well-established supply chains were able to quickly up their inventory levels before tariffs took effect.
On the other side of the supply chain, investing in logistics allows for quicker, more efficient parcel delivery. Companies with sophisticated warehouses and an advanced understanding of their shipping profile can efficiently pack and ship goods, cutting down on costs and potentially reaching customers faster. If warehouses have a thorough understanding of how much inventory they need on hand, they can fulfill an order placed via smartphone in a matter of days, rather than waiting for the product to be dispatched from another part of the supply chain.
“Investing in logistics” doesn’t have to mean building your own facilities. Most companies, and the vast majority of small- to medium-sized businesses, choose to outsource transportation and warehousing. A key part of supply chain management is choosing the right partners and making sure they’re delivering the service levels that you and your customers need.
Reveel can help with that. Our team of expert consultants helps companies of all sizes audit their parcel spending to understand exactly where their shipping budget goes. We do parcel auditing at the package-by-package level to identify opportunities for savings. Invoice auditing dives deep into your carrier’s invoices to make sure you’re getting all the refunds you’re owed.
We call this “shipping intelligence” — data that can reveal inefficiencies in your shipping spend and identify opportunities for savings. Then, we use those specific savings opportunities to help our clients prepare for contract negotiation. That might mean identifying an ideal parcel rate or reducing a certain surcharge. Changes that seem small can lead to surprisingly large savings.
If you spent more than you planned to on shipping in 2018 — and most shippers did — reach out today for a free invoice audit. We have a proven track record of helping our clients save as much as 20% on shipping services.