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Inventory Right-Sizing Weighs on Logistics Spending

As with retail, the logistics industry is in transition and transportation costs are set to rise.

What’s more, U.S. retailers’ inventory glut will lead to a pullback on goods purchases and weigh on logistics spending, according to the annual State of Logistics report out by A.T. Kearney.

“While economic carrier conditions are expected to continue favoring a “shipper’s market” over the next six months, a realignment of factors—including capacity, inventories, interest rates, and economic growth—are projected to result in moderately higher transportation rates in 2017,” according to the report, which added that oil price risk will likely put upward pressure on fuel-related surcharges.

Logistics costs for U.S. companies grew 4.6% on average annually between 2010 and 2014, owed mostly to 5.5% annual growth in transportation costs. The drop in energy prices, however, slowed logistics costs to just 2.6% growth between 2014 and 2015. Rail revenues fell 8.9%, while parcel and express grew 8 percent on the constant acceleration of e-tail. Truck tonnage flattened in 2015 after rising more than 7 percent a year earlier, according to the Bureau of Transportation Statistics.

Overcapacity in full truckloads (FTL) drove transportation rates down too, with revenue growth just 3 percent.

However, as the report noted, “Energy markets may correct, truck overcapacity could level off, and other constraints—such as driver shortages—could push FTL rates up in the not too distant future.”

Now that consumer sentiment is back on an upswing and the housing market is stronger, housing construction jobs could pull from the already limited pool of truck drivers, sending labor costs further up for logistics firms as they compete with builders for the same potential employees. Regulations like hair follicle drug testing are affecting driver availability too.

The costs of carrying inventory is also going up.

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Company inventories grew steadily at around 5 percent between 2009 and 2014, flattening out last year, but the stagnation in inventory growth as retailers slowed down their buys to combat inventory excess, was countered by a 5.1% increase in inventory carrying costs.

Consumer spending, which accounts for close to 70 percent of U.S. GDP, is typically one of the most important drivers of logistics activities. But the fact that it was one of several key indicators trending downward late in 2015 and early this year, is evidence of inventory correction, according to the report.

Retailers are working to get inventories right after unexpected and untypical weather left many with a glut of warm-weather gear, and because consumer tastes are preferences are shifting, retailers not only have to focus on right-sizing their inventory but making it available in the right place at the right time.

“Consumer expectations are changing. They want their products delivered fast, and they don’t want to pay a lot of money for delivery,” Marc Althen, president of Penske Logistics, said in the report. “Shippers are struggling to meet the challenges these expectations create, and many are turning to outside logistics companies for the expertise and support.”

Though the logistics system is sound, according to the report, gaps between the accelerating trend toward speed and available infrastructure, will continue to pressure a system that wasn’t designed for e-commerce-driven “last mile, last, minute.”

“As retailers adapt their operations to meet demand for online shopping and compete on rapid fulfillment, we are seeing their demand for transportation and logistics services also change,” David Vernon, equity analyst for Sanford Bernstein, explained. “While there are many start-ups targeting this need, crowdsourced models seem to be struggling. And retailers are being forced to insource, heavily subsidize delivery costs, and increase inventory levels. Today’s large parcel and express carriers play a critical role in the U.S. logistics system. Adapting their services to a market with demand for ‘last mile combined with some last minute’ will be the critical challenge—or opportunity—facing this sector in the years ahead.”

With more retailers moving toward same-day delivery and more consumers capitalizing on flexible e-commerce return policies and generating a swell of small shipments, FedEx and UPS are facing a major challenge in pickup and delivery density. That strain, however, has played to the U.S. Postal Service (USPS) strengths, as shipping and package volume grew 14 percent in 2015.

“Parcel and express industry leaders are working feverishly to address these challenges,” the report noted. “One way they are doing so is by investing significantly in technologies such as robotics, vehicle routing software, and partnerships with USPS.”

Logistics and transportation costs are major factors for big retailers and there’s constant pressure to reduce these costs—and the only way to combat them, it seems, will be to improve the supply chain.

“There are many inefficiencies in the supply chain—a lot of trucks are still in the wrong place at the wrong time, for example,” Bradley S. Jacobs, chairman and chief executive officer of XPO logistics, said in the report. “Freight goes by air when it could just as easily go by sea. Freight moves by expedite when it’s not urgent. Products are misdirected or shipments delayed due to less than 100 percent inventory accuracy. All these types of inefficiencies need to be addressed with laser focus to bring supply chain costs down.”

Over the next 10 years, the logistics sector will enter into a new era, according to A.T. Kearney.

“Disruptive forces such as technology (including, for example, the Internet of Things, analytics, robotics, and 3D printing) and operational constraints (such as regulations, driver shortages, and infrastructure bottlenecks) will evolve at breakneck speed and threaten to fundamentally change the rules of the game,” the report noted. “During the interim, those companies that build the skills to adapt to these disruptions will likely come out ahead.”