By formal definition, logistics is."that part of the supply chain process that plans, implements, and controls the efficient flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customer requirements" - and it's BIG business today.
Logistics, as a business concept, evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain. This led to a call for experts referred to as supply chain logisticians, people who focus on "having the right items, in the right quantity, at the right time, at the right place, in the right condition to the right customer."
There are three primary types of logistics that comprise the industry: inbound, outbound, and reverse. Inbound logistics concentrates on purchasing and arranging inbound movement of materials, parts, and/or finished goods from suppliers to manufacturing or assembly plants, warehouses, or retail stores. Outbound logistics is the process related to the storage or movement of the final products, and the related information flows from the end of the production line to the end user. And, as one might expect, a portion of what goes out typically comes back creating the need for reverse logistics, which is the process of handling products that are returned.
In the United States alone, according to recent reports, logistics is a $250 billion per year industry. The growth and progress of this industry can be attributed to many things, most notably, improved road systems, the rise of the Western economy, and what seems to be an insatiable appetite of the American people for the consumption of goods.
Logistics is estimated to account for 8.7 percent of the total U.S. GDP and is continuing to grow, not just in services provided and outsourced, but also in terms of volume. The industry's third-party logistics (3PL) provider element accounts for more than $78 billion and is estimated to be growing at a rate of 15 percent to 20 percent per year principally because of the intrinsic benefits, such as the reduced need for personnel, reduced transportation/distribution costs, potential for improved customer service, improved cycle time, and the ability to free up needed capital to deploy in other more strategic core business areas.
Change as a Constant
With all of this growth and progress, there is change. Change is a given in the world of business; the only variable is the rate at which change will occur. Of the top 50 Fortune 500 companies listed in 1991, only 15 remain as of 2011. Changes in the U.S. economy have heightened the importance of goods distribution as an economic engine. With the decline in manufacturing jobs, the result has been a raised profile of the goods distribution industry as a resource of well-paying industrial jobs that may not require postsecondary degrees.
The Bureau of Labor Statistics projects a 4.2 percent increase in wholesale trade employment, and 9.8 percent in transportation and warehousing employment by 2018. These projections - along with expanding geographical boundaries and the rate at which 3PLs are anticipated to grow - all point to a favorable future in logistics/distribution projects. The strongest growth is anticipated within the mixed freight, pharmaceutical products, commodities, electronics, and other electrical equipment categories.
The value of U.S. imports and exports have more than doubled since 1989 and are now more than $3 trillion. In addition to the changing economy, recent studies indicate that 95 percent of the U.S. CEOs believe they should have some form of logistics strategy, and nearly 50 percent of the nation's CEOs are incorporating supply chain planning into their overall business strategies.
Newer, More Modern Facilities
During the 1990s construction of logistics buildings increased. In fact, demand for warehouse and distribution space has steadily increased during the past three decades, and commodity shipment trends indicate that space demand is likely to continue to grow.
A recent report produced for the National Association of Industrial and Office Properties (NAIOP) projects the need for some 700 million square feet of new space to be built between now and 2018. In addition to new facility needs, there is also a significant need to replace older obsolete facilities, which averaged 300 million square feet between the years 1990 and 2003. If this trend continues, we might anticipate that 3.5 billion to 4 billion square feet of warehouse and logistics space will be built by 2020. The end of the recession has allowed companies to focus on expansion and deployment of new, more sophisticated technologies, which correlate to a rise in logistics and distribution projects.
Real estate inventory and employment related to logistics buildings have also shifted in design, with the result being more square footage per worker today than in the past. Today's centers are modern and efficient and are the heart of logistics in providing control, efficiency, and velocity for goods moving through the system. Elements of warehouse and distribution centers continue to evolve and to accelerate through several trends, such as the general trend toward outsourcing to 3PLs, the unprecedented growth of e-commerce, and the importance of the partnership aspect of the manufacturer/marketer and logistics provider relationship.
4PLs and Other Trends
Outsourcing provides the ability to leverage another's strengths, which may free-up internal distribution infrastructure and resources. Outsourcing may be directed to 3PL providers; however, there is an emerging trend in 4PLs; whereas the 3PL provider targets a specific function, the 4PL provider targets the management of an entire process to include transportation, customer relations, billing, and human resources.
Because of the forces shaping supply chains, changes in warehousing and distribution will continue. Competition will continue to pressure operations to be more efficient while catering to more demanding customers. The key is that the industry is always changing, and an outside provider may be more nimble, allowing a company that has traditionally handled distribution to better control expenses and utilize internal resources.
Other trends impacting growth in the industry and decisions of where to locate warehouse/distribution/logistics facilities include reductions in transportation costs. These reductions have enhanced productivity, opened new markets, and altered trading patterns. This, in turn, has led to just-in-time logistics planning that seeks to minimize inventories and storage, create incentives for more horizontal integration of supply and distribution networks, and spur development of new distribution hubs.
The distinction between distribution and production has become increasingly blurred with value-added services such as parts, production, assembly, and customer service all integrated under the same distribution center roof. Other considerations include centralization vs. regionalization, government regulations, security, technology, business management, and further business drivers such as energy and work force quality/availability, real estate, land and building, price/availability, business tax structure, and opportunities for economic development incentives.
Changes in the industry have provided an opportunity for some regions to capitalize on new business opportunities that, in turn, have led to job creation and significant capital investment. Other regions tied to more traditional supply chains have and will continue to suffer.
In various regions around the country, creative economic development incentive tools and strategies are being deployed to capitalize on market potential. The effective use of federal, state, and local incentive options by companies helps to reduce overall initial project expansion/location costs in addition to long-term operating costs. Those organizations that are highly focused on improving the bottom line will take strategic advantage of available tools either on their own or in partnership with a professional site selection and economic development advisory services firm.
Some examples of effective incentive tools that states and communities have utilized to attract and retain the distribution/logistics sector include:
- Sales tax recapture agreements: Through a restructure of business operations, a company can source all sales through one location vs. multiple locations. As an inducement for the company to change its business operations, an agreement may be structured in which the company and community share in the percentage increase over the original base sales tax amount for an agreed upon period of time.
- Personal and/or real property tax reductions: In exchange for creating jobs and making capital investment, the company may receive a partial exemption/abatement/reduction of property tax liability over an agreed upon time. This is an effective tool in most areas of the country with respect to real property tax assessment, and in some locations where both real and personal property taxes are levied.
- Forgivable loans: In exchange for a certain level of job creation and capital investment, a community may provide an upfront "loan" for building improvements and/or purchase of machinery and equipment. As the job and investment commitments are met, the loan is "forgiven" over some period of time, often in annual increments.
- Tax increment financing: This is an exceptional tool whereby incremental increases in assessed value are captured and utilized for land acquisition, building purchase, facility improvements, and/or needed infrastructure to support a project.
- Training assistance: Many federal, state, and local programs are available to help companies offset training costs associated with new and incumbent work forces. As a general rule, the primary objective of training assistance programs is to provide transferable skills that will aid the employee in developing lifelong skills needed in the workplace.
- Tax credits: Credits to offset a variety of business taxes may be offered in support of a business' commitment to make capital investment and create jobs over a specified period of time. The reduction of tax liability can be very meaningful to companies as they make investments in growth. Some tax credits may be refundable, meaning that if the value of the credit exceeds the amount of tax liability, the difference is refunded to the company in the form of cash.
Need for Continued Innovation
The above represents a sampling of potential economic incentive opportunities that may be available to support the growth of the logistics industry. In today's logistics field, it is critical for leaders to have a solid overall strategy so that they know what to do, why they are doing it, and how to get it done. Those companies that are flexible and agile are most likely the ones to prosper in the long term. Of critical importance is the building and maintenance of a dynamic portfolio of activities and resources. Leaders should also ensure a balanced organization - one that encompasses strong metrics, fosters a creative environment, and has focus, flexibility, and agility to balance existing activities with new opportunities.
Over the past several decades the logistics sector has evolved from being simply one aspect of a larger business process to a viable and thriving industry in its own right. This change has been reflected in changes in federal, state, and local policies as well. In the past, economic incentive resources and discretionary spending have been geared predominantly toward manufacturing operations. Now, many state and local governments have designed creative new approaches to compete for new business investment in the logistics sector, with some communities actively promoting themselves as logistics hubs.
What has not changed is an environment marked by fierce competition for new investment. While it is difficult to predict what changes will occur in the logistics sector in the coming decades, one constant will be the need for continued innovation from businesses and communities seeking to remain competitive in this arena.