The answer is threefold:
- Logistics should determine a location — and not locations determine logistics;
- Logistics is experiencing tremendous technological changes; and
- Logistics is about to become a lot more expensive.
For the past decade, corporations have curtailed planned capital investments in new facilities and instead have concentrated on optimizing their entire supply chain to capture savings, increase productivity, and better meet changing consumer demands. This optimization process included revamping supplier networks, analyzing various transportation options, improving inventory control, upgrading material handling and packaging methods, redefining work forces, and reassessing future location and facility requirements. As a result, American manufacturing has become more lean and mean, and manufacturing has led the way in what has been a slow recovery of the U.S. economy.
Corporate site selectors are seeing an increase in activity not seen since 2004. Capacity utilization rates have almost rebounded to their near normal average of 80 percent, a threshold that typically triggers investment in new facility capacity. Indeed, industrial real estate has become the new choice for institutional investors, as vacancy rates and cap rates have both decreased considerably. It appears that a more sustained U.S. recovery is under way, but this U.S. recovery, along with global influences, will have consequences for logistics.
“As the economy changes, as competition becomes more global, it’s no longer product vs. product, company vs. company, but supply chain vs. supply chain.” — Fortune magazine, February 1995.
With new investment in facilities on the rise and the “Amazon effect” unfolding, the main focus on supply chain optimization is moving on from improving and upgrading the systems and activities inside the facilities, to the outside where there is more emphasis on improving the time, efficiencies, and costs associated with transportation, including just-in-time (JIT) supply chains on the inbound side to omni-channel fulfillment and last-mile delivery on the outbound side. On average, transportation accounts for more than 50 percent of all supply chain costs, with inventory costs accounting for 20 percent.
All modes of transportation (trucking, rail, ocean, and air) play a very important role, and each has its own operational and commercial advantages. Most of the transportation costs are associated with trucking, as trucking moves approximately 70 percent of all goods in the U.S. In fact, 80 percent of all of the communities in the U.S. are served by trucks only.
If large loads need to be moved more than 300 miles, rail is probably a better alternative to trucking from a cost standpoint. However, knowing in advance where loading ramps, intermodal facilities, and working spurs are in the system is essential. Keep in mind that not all rail ramps and intermodal facilities are created equal. For example, only certain intermodal facilities offer truck “trailer-on-flat-car” (TOFC) access.
In today’s world, what is most important is the integrated transportation system (intermodal and multimodal). To be successful, the integrated transportation system needs to provide a great deal of coordination, flexibility, and complementary features including safety, cost, accessibility, scheduling, reliability, and good service. Even though costs versus time are the most important factors in considering which mode or mode combination is best, other factors such as distance, quantities, weight, dimensions, loading and unloading, service, congestion, and routing are all important to individual shippers. Please note that a good logistics analysis prior to selecting a site should include these logistics considerations as well.
Some areas of the country are natural logistics hubs. Many have natural features such as deepwater harbors (San Francisco and New York City) or large navigable rivers (St. Louis and New Orleans) or lakes where ports have developed (Chicago and Cleveland). Ocean ports are typically gateways to international trade (Los Angeles and Savannah), but from a domestic logistics standpoint they are limited by the water they are backed up against. Port-centric real estate is in high demand and, thus, costly if at all available. This has given rise to more inland ports.
Some logistics hubs are historic rail or highway nodes (Kansas City and Dallas) that continue to grow. Most large logistics hubs are in major metro areas. One thing that the largest metro areas have in common is that they possess many different transportation modes that, in combination, provide the region a robust range of transportation options and services that ensure they have efficiencies and competitive pricing. Other common traits include having large populations with related workforce and consumer markets. All combined, these metro area logistics hubs attract even more investment across many industries, which helps to diversify the local economies, which in turn helps sustain the region. However, congestion and higher operating and living costs eventually catch up with the inner-city density, causing sprawl to the suburbs. U.S. suburbs are where the majority of Americans live (51 percent as of 2015). Suburbs are also the areas where most industrial land and facilities are located and have the heaviest transportation traffic flows. New developments in transportation technology (drones and autonomous vehicles) will occur in these metro areas first, as the technologies strive to deliver better logistics services to the greatest amount of people.
As the economy changes, as competition becomes more global, it’s no longer product vs. product, company vs. company, but supply chain vs. supply chain. Fortune magazine, February 1995 Rural areas have had the most difficult time. Rural U.S. population is currently at its lowest point in U.S. history and now accounts for just 16 percent of the nation’s population. In comparison, the population share of rural America in 1910 was 72 percent, 50 percent in 1920, and 25 percent by 1980. The outflow has been significant. Historically, there has been little federal government assistance or strategy in place to help address the situation. Rural communities have been on their own, which says volumes about their pioneer spirit and heritage. Quality of life, independence, and lower costs of living are rural areas’ main appeal.
Currently, the logistics opportunities are dependent upon how remote a particular rural community is from metro areas, and more specifically how connected they are to the transportation network. Rural communities typically fall into one of four different classifications:
- Communities close in to a metro suburban area in which they may eventually become suburbs themselves;
- Communities that are truly rural, but have access to a good four-lane state highway or close access to an interstate highway, have rail access, or may be a regional retail hub;
- Rural communities or locations relying on attracting a great deal of tourism; and
- Rural communities that are just plain “out there,” far from traditional logistics transportation and with no rail.
On the Horizon
In sum, there are some major events that could affect logistics in the very near future. After decades of neglect, there is fairly wide bipartisan support for a major investment in upgrading and repairing America’s infrastructure. While this is great news, the proof will be in the legislation itself. In addition, America is poised to become not only energy- independent, but also a global leader in energy-related exports — lowering our trade deficit and providing long-term lower energy prices to manufacturing and transportation.
There also exists a more looming situation. We are about to enter a significant capacity shortage situation in trucking. It is already difficult to find enough qualified truck drivers. A perfect storm may be brewing in three crucial areas that could exacerbate the driver situation. This December the federal government will implement regulations mandating that electronic logging devices (ELDs) be installed on all trucks built since 2004. This will force a significant number of small and medium-sized trucking companies and independent truckers out of business, adding to the 70,000 + trucking companies/individuals that have gone out of business over the past 10 years.
A major competing industry to truck driving is construction. There exists the real possibility that there will be an upswing in construction jobs due to the improved economy, the rebuilding following the recent hurricanes and fire devastation, as well as the construction work on the infrastructure. The capacity situation in trucking will most definitely raise logistics cost significantly across all industries.