What's up With the Rise in Logistics Spending?

There was a perfect storm that hit the freight market hard last year. 2018 saw the implementation of e-logs and a record shortage of drivers. These two things combined left shippers paying record high prices for incredibly limited shipping options. The only solution at the time was to raise logistics spending budgets. 

The dust from that storm has since settled, but freight spending has continued to rise well into 2019.

According to a report from the Council of Supply Chain Management Professionals (CSCMP), U.S. businesses spent a total of $1.64 trillion on logistics in 2018. This number is up 11.4 percent from 2017.  $1.64 trillion of that makes up 8 percent of the gross domestic product, which is up from 7.5 percent in 2017 and is at the highest level since 2014.

In this blog post, we’ll take a quick look at what contributed to the jump in spending and why it continues to rise well after the storm has settled. Additionally, we will look at exactly how this spending will affect the trucking industry.

How we got here – Increased Logistics Spending

There are many factors besides economic growth that have helped increase logistics spending to record levels. 

For starters, we need only turn our attention to the tech sector. In recent years, the demand for information technology services in the logistics industry has grown exponentially. More and more companies are deploying IT resources into their supply chains than ever before. And at a rather unprecedented rate, if you want to go that far. This trend will likely continue as small and mid-sized businesses strive to get a leg up against larger competitors. Big data is big business, and well-rounded software platforms and blockchain technology serve to improve the speed and efficiency of supply chain operations.

E-commerce retailers gave logistics spending a push upwards thanks in part to the desire to speed up shipping windows. Amazon, long known for its Prime two-day shipping, is a prime example of this.

Overall, this increased focus on shipping speed and efficiency has been a driver in logistics spending.

Is the Spending Expected to Continue?

The big boom in logistics spending this year may be winding down thanks to tariffs, but it doesn't appear that it will be held down for long. Having said that, there are still many who expect that economic growth will slow during the back half of this year.  Some companies have even gone as far as to stock up on products. Most of these companies are riding on the speculation swirled on by increasing tariffs.

This has contributed to an increase in logistics spending earlier in the year. But it will also be one of the reasons why spending will slow down just a bit as we close out the year.

Transportation costs are the largest single component of the United States Business Logistics Costs (USBLC) at 63.3 percent. This number is up by 10.4 percent from last year.

The second element of USBLC was inventory carrying costs. This number was up 14.8 percent from last year and continues to hover in that general range. 

Logistics and inventory carrying costs both saw significant increases in spending. And with the e-commerce push for fast shipping and an always stocked inventory, we can expect these transportation spending numbers to continue to increase.

These numbers may not surge as sharply as they did over the last year. However, costs should continue to increase gradually. With the release of newer technology and methods of fulfilling processes, spending will continue to rise.

How Increased Spending Impacts the Truck Market

There’s no denying that carriers are having a tough time finding drivers but the tighter market and higher freight rates have been beneficial to their bottom lines. Carriers didn’t have the capacity to meet the demands of shippers who tried to increase their inventory before tariffs kicked in.

The spot freight market increased 25 percent from the post-holiday slump in February to the summer peak before falling 20 percent to the end of the year. This caused shippers across almost all industries to exceed their logistics budgets according to CSCMP report. 

Regardless of how companies are shipping their products to their customers, their carriers can expect continued growth.  According to the USBLC, here are the five-year growth rates for a variety of transportation types:

Truckload: 3.6 percent
LTL: 3.5 percent
Private/dedicated fleet: 7.1 percent
Parcel: 8.0 percent
Intermodal: 8.1 percent
Air freight: 3.8 percent

Economic growth is great for both shippers and carriers because everybody wins.  While last year’s storm caused many companies to overspend their logistics budgets, there will continue to be an increase in logistics spending, albeit at a much more manageable growth rate.