Freight Is Getting Bigger. And Also Smaller.
At first glance, it seems to defy the laws of supply and demand.
Supply-chain activity is increasing, largely driven by e-commerce and small-parcel delivery. We all learned in economics that when there is increased demand for a fixed inventory of goods or services (in this case, capacity), prices rise to meet the demand. At Christmas, if there are only a certain number of Tickle Me Elmos, and everyone wants one, the price goes up. So logistics costs should be going up, right?
Not so fast. In fact, U.S. logistics costs fell by 1.5% in 2016 after five straight years of increasing, according to the recent 28th annual State of Logistics report published by A.T. Kearney and the Council of Supply Chain Management Professionals. It was the first such decline since the Great Recession.
So is there something wrong with the classic supply-and-demand equation? Let’s investigate further. It seems that even though supply-chain activity is increasing, there is actually overcapacity. The economic details about it are a little complicated but simply, even though there is more demand, there is also much more ocean container supply. And that’s driving prices down.
Figuring Out the Pricing Paradox
Ocean freight capacity is obviously relevant to ocean freight costs, but we at CoLoadX have an alternate explanation for the decrease in overall logistics costs, and it has to do with freight size. Any freight forwarder can tell you that the smaller a piece of freight is, the higher its transportation costs per pound, kilogram or cubic meter. Plus, smaller freight often moves at “minimums” or “de minimis” charges, which should mean that an increasing number of smaller shipments should be driving up freight costs, not down.
The reason that’s not happening is that when you have so many small parcels, bulk pricing starts to become more widely available. Minimums are getting lower specifically because the volume of small freight is increasing. It’s almost as if the higher cost of a small parcel is being offset by the aggregate volume of those parcels. “As a result all shippers are realizing the benefit of lower unit costs.”
Where Wall Street Meets Container Ships
The nuances of size and cost aside, there’s a bigger story here: logistics companies are entering an environment where the number of shipments is going to continuously increase as cross-border e-commerce sales increase. The problem is that this growth will increasingly strain the resources of logistics companies whose manual processes currently used to process shipments cannot keep up with the growth in transactions. It’s more than a company can handle on a spreadsheet — or even on a dedicated software platform. The entire industry needs to be moving towards powerful algorithmic cloud-based solutions.
That’s more than just techno-jargon. Think about your organization’s ability to handle an increase in shipment volume in an environment where your only option is to hire more manpower just to keep up. Business could be booming, but your profits will be drained away by the costs of manual processes needed just to keep up with the new demand. Banks and stock brokerage business solved this problem years ago by separating their service business from the commodity business. For logistics companies this means automating shipment quoting and booking processes so that pricing and order execution can be done with “one click” just as 100 shares of Apple stock are bought and sold, or just as a book can be purchased online in 30 seconds or less.
So, no, classical economics is not invalid. Supply and demand holds. But in today’s complex world, seemingly opposite things can hold true.
Yes, freight can be getting bigger while it’s also getting smaller.
Download the free CoLoadX whitepaper, “Logistics as a Service: How it Will Transform Your Ocean Freight Business” and see how LaaS will help your company grow.