Logistics Spending Rises, Led By Warehouse Services
This story appears in the June 23 print edition of Transport Topics.
WASHINGTON — Business spending on transportation and logistics hit $1.39 trillion last year, an increase from $1.35 trillion the year before, according to the 25th annual “State of Logistics” report.
Measured against total economic output, however, logistics costs declined for the second year, indicating that the freight sector is not keeping pace with growth in the overall economy, according to the report from the Council of Supply Chain Management Professionals.
“The factors pushing up [gross domestic product] were mostly counter to the growth of freight volume,” Rosalyn Wilson, a transportation researcher and author of the report, said here June 17.
Increased inventory levels and a slowdown in the growth of imports and exports kept demand for freight hauling down in 2013, but, Wilson said, the first five months of 2014 “have been the strongest since the end of the Great Recession.”
She also said she expects 2014 to be “a banner year” for freight and the economy.
Demand for warehousing space has been especially strong, Wilson said. The observation comes as companies move away from centralized distribution networks and retailers shift more inventory from stores to regional distribution facilities.
Spending on warehousing rose 5.6% to $137 billion and, she said, the growing demand for storage space reduced the industrial vacancy rate to 8% in 2013 from 8.9% in 2012.
Spending on truck transportation, the largest component of transportation costs, increased only 1.6% to $657 billion in 2013 from $647 billion in 2012, according to the report. Spending on rail transportation was $74 billion, up from $72 billion.
During the event here, a panel of experts representing shippers and logistics providers expressed concern about truck capacity, related to a shortage of drivers and a loss of productivity as a result of recent regulatory changes. In addition, increased congestion on rail networks and slower containerships are causing delays and service disruptions.
Marc Althen, president of Penske Logistics, a unit of Penske Truck Leasing Co. in Reading, Pennsylvania, said his company is seeing increased demand for dedicated contract carriage, distribution center management and transportation management.
As a result, he said, efforts to develop “human capital” to staff the company’s perations, “is keeping me up at night.”
“Right now, if we could find 1,000 to 1,500 drivers, we could put them to work immediately,” he said.
Richard Jackson, executive vice president of Mast Global Logistics, a subsidiary of Limited Brands Inc., based in Columbus, Ohio, said transportation has become slower and less reliable in the past 12 to 18 months.
“We’re seeing freight delays now where there used to be fairly reliable service,” said Jackson, whose company handles distribution of clothing and fashion goods.
John Herzig Jr., vice president of distribution and logistics at the customer logistics service center for Bayer HealthCare in Mishawaka, Indiana, said his company sees more freight moving in truckload quantities as the pharmaceutical industry consolidates. He said he is worried about finding enough capacity to handle shipments of drugs and medical devices that require high levels of security and cargo protection.
“We need to get better at planning and collaborating with service providers,” he said.
Patrick Ottensmeyer, chief marketing officer of the Kansas City Southern railroad in Kansas City, Missouri, said rail carriers are “spending heavily” to address service problems from rough winter weather and now surging demand for service in the oil field and by agricultural shippers who are anticipating a bumper crop for corn this year.
“We see growth in all segments except coal,” Ottensmeyer said. “In our service territory alone, 18 to 20 new ethylene production facilities are under construction.”
Fueled by low-cost natural gas, the new plants are expected to boost U.S. production of plastics by 50% when they come on line in 2017 and 2018.
“That’s like tomorrow in terms of supply chain planning,” Ottensmeyer said.
Meanwhile, the report found that spending on water transportation was $37 billion in 2013, compared with $35 billion in 2012; pipeline and air transportation was unchanged at $13 billion and $33 billion, respectively; and spending on ocean freight forwarding was $38 billion, up from $37 billion.
Inventory carrying costs, which include expenses for warehousing, interest, taxes, obsolescence, depreciation and insurance, rose 2.8% to $469 billion, the report said.