One trillion dollars. That's roughly how much U.S. businesses spend every year on logistics. In fact, the actual amount spent in 2012 was $1.331 trillion, which was an increase of $43 billion from 2011 (a growth rate of 3.4%). To put that number into perspective, $1.3 trillion equals 8.5% of the U.S. Gross Domestic Product (GDP). While the U.S. economy may still be in a state of torpor, the amount spent on logistics in 2012 was the highest since 2008's $1.344, and the third highest ever.
As the recovery-that-doesn't-feel-like-a-recovery continues, it's time to ask if this is the new normal, says transportation analyst Rosalyn Wilson, author of the annual State of Logistics Report on behalf of the Council of Supply Chain Management Professionals (CSCMP), and presented by Penske Logistics. "We are experiencing a new order that is translating into the new way of life for the economy and the logistics and supply chain sectors for the foreseeable future," she adds.
That new order, she suggests, is characterized by slow growth; higher unemployment; slower job creation; higher healthcare costs; and more reliance on part-time workers who do not receive benefits. Freight service has become less reliable as volumes begin to rise, but capacity is not increasing quickly enough to fully meet demand. "The single biggest accomplishment resulting from the Great Recession," she says, "is the increased productivity across almost all sectors of the economy. Everywhere we have learned to do more with less."
In that vein, shippers are certainly learning to cope with less capacity, particularly when it comes to motor carriers, which account for 70% of all goods transported in the United States as well as 80% of all transportation costs. The recession saw many trucking companies go under, and recent government regulations—requiring new, environmentally-friendly engines while shortening the amount of time drivers can be behind the wheel—have made it more expensive for the remaining carriers. While there is no immediate danger of shipments being left at the docks for want of an available truck, there are unmistakable warning signs on the horizon that shippers will need to closely monitor.
The first warning sign is the tightening of truck capacity. According to Wilson, utilization rates are at all-time highs, between 95-97%. On top of that, the new Hours of Service (HOS) rules, which went into effect on July 1, "represent a theoretical 17% reduction in a standard work week," she notes. "Estimates abound on the actual impact of the new HOS, but fall somewhere between a 2% to 10% productivity decrease."
But hold on, it gets even worse. The HOS rules could also result in a 2% to 5% reduction in driver capacity, a particularly nettlesome occurrence given that the industry is already short by about 30,000 drivers. And don't look for the motor carriers to compensate for the capacity gap; according to advisory firm Transport Capital Partners, 76% of carriers surveyed plan to add little (1% to 5%) or no capacity in the coming year. Only 24% of carriers say they plan to increase capacity by more than 5%. And of that number, only 19% of larger carriers plan to add more than 5% capacity, says Richard Mikes, TCP partner, with the smaller carriers being more likely to add another truck or two to their fleets.
Considering that the trucking industry is at or near a 100% turnover rate for truck drivers, the labor costs to attract and retain drivers could jump quickly as experienced drivers change jobs in search of better pay, Wilson (who also provides analysis for the Cass Freight Index report) observes. Although rail/intermodal can absorb more freight, she believes truck shortages could become a serious problem as we enter the fall months.
"Shippers expect trucking capacity to tighten broadly, with truckload capacity to tighten the most," observes William Greene, senior transportation analyst with financial services firm Morgan Stanley. And tighter capacity inevitably leads to two things: rate increases and mode shifts. According to the latest Freight Pulse survey of shippers, conducted by Morgan Stanley and MH&L, expect to see shippers moving more of their freight to rail and intermodal, and as a result, rates for those two modes are expected to rise by more than 3% over the next six months (see chart at left).
In another study of shippers, this one conducted by the National Shippers Strategic Transportation Council (NASSTRAC), nearly eight out of ten (79%) respondents say they have shifted freight from one mode to another, with a shift to rail/intermodal (38%) being by far the most prevalent (see chart on pg. 19). Forty-two percent of respondents said the main reason for shifting modes is cost savings, and what's more, 58% anticipate executing a modal shift at some point in 2013.