U.S. business logistics costs fall 4% in pandemic year of ‘chaos,’ new study finds

U.S. business costs, buffeted by a COVID-19-decimated year of “chaos” worldwide in 2020, fell 4% to $1.56 trillion. That amounted to 7.4% of Gross Domestic Product (GDP), nearly an all-time low, according to a new authoritative report on the logistics sector.

The 32nd annual State of Logistics report released today was produced by A.T. Kearney consultants in partnership with the Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics.

Entitled simply “Change in Plans,” the report details a year of what it calls “chaos” in the logistics industry as professionals grappled with changing consumer demands at the same time transportation networks were scrambled.

“The result is that no logistician was able to simply stay the course in 2020, and conditions ahead will require even greater adaptability and nimbleness,” the report summarizes.

The global pandemic caused global supply chains to suddenly stop early in 2020. Then they started again, haltingly. Then they had to be rerouted, sometimes stopping again, sometimes facing capacity shortages or price increases, often stymied by unexpected bottlenecks.

Stay-at-home consumers increased demand for last-mile deliveries. Logistics proved essential to fighting the pandemic, even before the delivery of vaccines.

“Yet the pandemic made shippers’ and carriers’ assets less efficient and destroyed any idea of predictability,” the report said.

Even with service outcomes largely deteriorated, the logistics sector proved to be “remarkably effective given the disruptions,” the report concluded.

Not that everything is rosy, however. While some shippers and carriers are profiting from COVID-related moves made last year, others are laying groundwork for the future through greater e-commerce activity and the need for more resilient, nimble supply chains. The report dubs such efforts as “multi-shoring”—in other words, not relying on one, often the cheapest, single source of labor and raw materials.

“Their multi-shoring efforts will increase demand for more logistics optionality,” the report concludes. “These efforts will also increase demand for visibility across logistics segments, and for the technology that can provide such visibility.”

Given the chaotic nature of 2020, it was remarkable U.S. business costs were so low. Logistics represented a mere 7.44% of GDP, a decline from recent years, and near the all-time low of 7.36% of GDP in 2016. (By comparison, in the final year before trucking deregulation in 1980, business logistics costs were slightly above 19% of GDP).

Of course, last year’s ratio was helped because the national economy shrank by 3.5% to $20.94 trillion. Logistics costs shrank 4% to $1.56 trillion.

The report labeled the current economic recovery as “K-shaped.” Some sectors, such as grocery, home improvement and e-commerce, are booming. Others such as hospitality, travel and restaurants are just now beginning to recover.

While transportation costs rose by 0.8% last year, that was far less than the 4.7% growth in 2019, and 10.4% rise in 2018. That transport increase was largely driven by the 24.3% boom in parcel and last-mile services, mostly represented by UPS, FedEx and some less-than-truckload (LTL) carriers.

These costs broken down by mode were:

• Motor carriage, the largest mode, was down 0.6 percent, due to reduced capacity in the pandemic;
• Air freight costs increased by 9 percent, as capacity was decimated by the cancellation of passenger flights, which carry about 50 percent of all cargo in the hold; 
• Ocean was down 28.6 percent, due to a combination of one-time reclassifications in underlying calculations methodology, a likely drop in exports and domestic water traffic, and lower container prices; 
• Rail was down 11 percent overall, driven by a 15 percent reduction in traditional carloads, while intermodal fared slightly better; and
• Pipeline was up 1.7 percent, despite reduced oil prices and volumes, reflecting high tariffs on contracts signed in busier times

The explosion in e-commerce (some of which was picked up in-store but nevertheless proved a boon to trucking companies) resulted in a 33% growth rate to $792 billion—some 14% of all retail sales.

“Terms such as DTC (direct to consumer) and BOPIS (buy online, pick up in store) became common retail language,” the report noted.

It called these “accelerations of existing trends” and they are likely permanent. Thus, shippers must adjust their delivery offerings and solutions, managing both capabilities and consumer expectations to create a better match while developing new ways to pay for these services and control their costs, the report added.

Trucking, the biggest segment of U.S. logistics spending, fell slightly for the year 2020. But a fourth-quarter recovery suggests that continued economic growth will keep rates high through 2021, until new trucks and drivers can increase available capacity.

“The need to avoid ‘touch’ processes during the pandemic may have overcome the industry’s long-standing resistance to digitization,” the report warned.

 And the recent bidding war by Canadian National and Canadian Pacific railroads over the Kansas City Southern, the smallest of the five U.S. Class 1 rails, “demonstrates” the still-high potential for a large, integrated north-south North American rail operation.

“But the path to realizing that value involves not only creative vision—such as new north-south configurations to meet multi-shoring demands—but also well-executed operational investments,” the report added.

In conclusion, the report said that the crises of 2020 forced logisticians to constantly change their plans.

“The changes were rarely easy or welcome,” the report concluded. “But the experience sets logisticians up well for the future, as the ability to change plans will rise even more to the fore as a priority.”