The New Year is a time filled with reflection and resolutions and that reigns true in the supply chain industry. Businesses reflect on their previous year and look to continue to reset their operations and develop new growth strategies. An integral part of planning for the New Year is predicting what can be expected in the overall supply chain industry. The supply chain is said to be a bellwether for the overall economy and our team of experts share their thoughts on where we are headed.
Supply Chain Overall
The U.S. Federal Open Market Committee (FOMC) has tipped their hand in setting the stage for 2016 in the U.S. market. The FOMC has begun to raise interest rates and plans to continue step up increases through next year. This is a good thing for the overall U.S. economy and the committee sites better job growth, wage and income gains, solid consumer spending, and improved housing activity as signs of a stabilizing economy. As jobs grow and wages increase, it will be interesting to see how consumers will spend. Will they spend on freight-friendly commodities and products or on services like healthcare which do not drive as much inventory demand? As for the global market place, we see a shift in manufacturing from China to Southeast Asia and back to North America as the Chinese middle class is created and the government struggles with its monetary policies. As for the European economy, it looks like the U.S. seven years ago and we do not see a lot of growth in the near future. With all of the moving parts in the global economies, it will be imperative for companies to add flexibility in their networks to allow for contingencies as demand shifts over the next few years.
David Broering, Senior Vice President
Much like the way the 2014 transportation marketplace went, 2015 has been fairly unpredictable as well, but in completely the opposite direction. We charged into 2015 with all of the headwinds of driver shortages and capacity issues, and we leave it with questions about the strength of the global economy and where the market demand will take us. The first half of 2016 is going to be fraught with similar challenges from the demand side, and tonnage growth year over year is going to be hard to come by. As the year moves on, and the effects of the interest rate hikes take hold, a stronger demand for U.S. products overseas and continued low cost of living for U.S. citizens should keep economic growth moving in a positive direction, and could lead to some supply tightness in Q3 and Q4. One of the biggest “what if’s” in the market I see for 2016 is the rate of bankruptcies for trucking companies that over-invested in early 2015 because of rate increases and a perceived leveling of the market. If the rate of bankruptcies goes up dramatically year over year, the over-supply of capacity that currently exists in the market could dry up much quicker than currently expected.
Warehousing and Distribution
William Mahoney, Senior Vice President
Businesses continue to spread their inventory out across the U.S market in order to get their products closer to the consumer. Same day shipping requirements will continue to force shippers to store inventory in more locations resulting in shorter lead times. This will lead to a continued high demand for warehousing and distribution services in more locations. I believe that there will be higher than normal growth since there is a lack of available space and shippers need the flexibility in their networks. We could see inventory growth of as much as 5-10% as companies add SKUs to their portfolios and carry more of this inventory throughout their supply chain. A tighter real estate market in the U.S. will also cause market rates for storage and lease to rise. It will be important to continue to maximize storage capacity at each distribution center, improve warehouse management systems to maximize labor productivity, and to find efficiencies to help our customers maintain a competitive unit cost.
William Mahoney, Senior Vice President
Based on the amount of inventory coming into the country as U.S. demand rises, I expect that capacity will tighten once again in transportation for 2016 following a market softening at the end of 2015. We are expecting higher transportation demand in response to increased inventories in our warehousing network. Although volume is dispersing back West following successful port negotiations, we continue to see a shifting of needs to the East Coast. Many shippers are seeing the value of having networks set up in the Northeast where they can reach densely populated areas quicker. As that demand increases, we continue to look to better utilize our equipment and control other variables such as driver’s wages, hours of service requirements, and higher transactional transportation costs. I believe that engineering will become an even bigger piece of the transportation supply chain as we continue to look to improve driver and asset utilization leveraging newer equipment with lower maintenance costs and improved MPGs. The market will continue to demand a high level of service which a dedicated fleet provides at a lower delivered cost versus buying at the transactional level.
Robert Garrison, President
Forecast for cost increases is mixed. On the one hand, global carriers will begin to rebound in the second half of next year as rates teetered near the bottom in 2015. With the planned mergers and rate softness, it is likely that carriers will continue to take aggressive actions to restore their profitability despite their continued overcapacity issue as we saw in the U.S. airline passenger industry. On the other hand, there is expected to be continued softness in the world economy. With many developed countries dealing with increased costs of maturing societies and declining productivity, and underdeveloped countries facing major challenges as well, it is unlikely we will see a huge increase in demand in the near term across the globe. There will be an increased use of technology to redefine the shipping industry. For examples, most other transportation-related industries have gone through fairly radical overhauls with new technologies like the taxi industry with Uber and the delivery industry with Amazon. Expect those technologies to become more main stream across all industries versus exceptions in a few.
Don Aiken, Senior Vice President
As challenging as the landscape was in 2015, all indicators are pointing to continued growth in Intermodal for the coming year. Fuel has stabilized and should remain relatively unchanged to slight increases for the next year. Driver capacity may become more challenging later in the year as the industry prepares to comply with the Electronic Logging Device (ELD) final rules issued earlier this fall that will begin implementation in 2017. Rail networks are fluid as the fall retail season comes to a close.
Michael Landsburg, Vice President
Interest rates are on the rise. It will be an interesting dynamic to watch how this impacts a capital intensive business like real estate. Rental rates have grown substantially over the last year and this will drive many owners to pursue more speculative construction as there is very little vacancy or industrial product available in most markets. We will have to see if the demand can keep pace with this rising supply and if the rental rate growth will continue for another year. My prediction is that it will. Ecommerce and final mile distribution will continue to be a very hot topic and will have impact across all real estate sectors, and how the continued shift to online and mobile retail will impact the retail stores themselves, where people live, and of course the distribution/supply chain networks of these retailers or etailers.