Talking Freight: Supply Chain Needs and Industrial Site Selection Decisions
August 19, 2015
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Nicole Coene
Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Nicole Coene and I will moderate today's seminar. Today's topic is the 2015 Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report.
Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.
Today we'll have three presentations, given by:
Ms. Rosalyn Wilson is a widely recognized expert in transportation economics and supply chain security. She has more than 35 years of experience in transportation and logistics, particularly freight transportation economics and supply chain security. She is a Senior Business Analyst with Parsons Corporation and leads the Real-Time Freight Intelligence (RTFI) team providing freight insight, analysis and near real-time data to the public sector, shippers and carriers, industrial real estate companies, and the finance community. Ms. Wilson is the author of the 26-year old Annual State of Logistics Report®, published by the Council of Supply Chain Management Professionals (CSCMP). She provides analytical commentary for Cass Information Systems' monthly Freight Indexes. She is also the co-author of Securing Global Transportation Networks, a supply chain security reference and college textbook and has a radio segment, "Roz's Transportation Tidbits," on the first Thursday of each month on The Dave Nemo Show on SiriusXM Channel 128.
Ms. Emily Feenstra is the American Society of Civil Engineer's Director for Infrastructure Initiatives, and manages infrastructure research and advocacy initiatives for the Society. Her projects include ASCE's Report Card for America's Infrastructure, the Failure to Act economic study series, and a recent study on the use of life cycle cost analysis in transportation planning. Prior to joining ASCE, Ms. Feenstra worked with the Intelligent Transportation Society of America, the Washington State Transportation Center at the University of Washington, and as a consultant for the Washington State Department of Transportation. She holds a bachelor's degree from Duke University and a Master's of Public Administration from the University of Washington.
Mr. Andy Moses is the Senior Vice President of Global Products for Penske Logistics. He is responsible for developing the go-to-market, pricing and operating strategies for the Dedicated Contract Carriage, Distribution Center Management and Transportation Management products of Penske Logistics. Mr. Moses has more than 25 years of transportation industry product and services sales experience with Rollins Truck Leasing and Penske Truck Leasing combined. While with Rollins, Mr. Moses held several executive-level sales roles and led the sales of logistics solutions such as Dedicated Contract Carriage. Since joining Penske in 2001 with the Rollins acquisition, he has handled national lease accounts and most recently spearheaded PTL's major efforts to productize and sell contract maintenance as Vice President of Sales. He holds a bachelor's degree from Brooklyn College and a master's degree from Penn State.
Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the chat area. Please make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. If time allows, we will open up the phone lines for questions as well. If we run out of time and are unable to address all questions we will attempt to get written responses from the presenters to the unanswered questions.
The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next few weeks, along with a recording and a transcript. I will notify all attendees once these materials are posted online.
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For those of you who are not AICP members but would like to receive PDH credits for this webinar, please note that FHWA does not formally offer PDHs, however, it may be possible to receive PDHs for your participation in Talking Freight if you are able to self-certify. To possibly receive PDHs, please download the agenda from the file download box and submit this agenda to your respective licensing agency.
Finally, I encourage everyone to please also download the evaluation form from the file share box and submit this form to me after you have filled it out.
I'm now going to turn it over to Roz Wilson of Parsons Corporation to get started.
Roz Wilson
Thank you with for inviting me again this year to review this presentation. The first thing that I would like to do is do a recap of the most recent report which was released in June of this year and then move on to what is going on now. Also I have updated a lot of the slides along the way to include the data for 2015 so they will look slightly different than they did from the original report.
So the cost for US business logistics has gone to $1.45 trillion and that is up by 43.4 billion dollars from 2013. 2014 was the best year for the supply chain industry since the great recession. Consumers began to drive the economy once again as consumer confidence measures sword back into the 90s. As I have been saying for the last four or five years consumers have been the element that is missing from the recovery. So in 2014 the US economy was in on fairly solid ground and new job creation was consistent. Inflation was low to moderate and gas prices tumbled. Personal savings grew in 2014 and households debt held relatively steady. We have learned some lessons since the credit crisis that led into the recession and we have increased our household savings rate and personal savings rate backup to where it was in the 1960s and early 70s. Household net-worth overall has surpassed pre-sub recession level but that increase has not happened evenly. What we find is that a lot of middle and lower income people a lot of their net worth is held in their house and not in a lot of things such as stocks and the stock market has done particularly well which means higher earners attended to benefit more from the increase in household net worth but it has gone up enough to make the total higher than it was prior to the recession. Logistics costs as a percentage of GDP. It went to 8.3% total logistics cost increased only 3.1% in 2014. We saw transportation costs rising 3.6% reflecting growth in all modes except for air and the logistics represents about 8.3% of the nominal GDP. The drop from 2013 indicates that the overall economy grew slightly faster than logistics cost. Keep in mind however that logistics costs are being suppressed by historically low interest rates which I will touch on shortly.
This is actually the logistics model that we use. It has three pieces to it. It has inventory carrying costs, transportation costs, and logistics administration. All components rose in 2014. Inventory carrying costs was 2.1% total business inventories rose again which pushed up the related costs such as taxes and depreciation warehouse costs increased where the rates rose and vacancy rates fell. Interest rates were down again in 2014 pushing the interest component down another 4.8%. Transportation costs were up 3.6% in 2014 mostly because of stronger shipment volumes rather than rate increases. Inventory carrying costs rose 2.1% in 2014. Interest rates drop yet again and inventory levels continue to decline. Although well below pre-recession rate interest rates are measured by the Federal Reserve's Commercial Paper Rate are up 71% from January 2014 to January 201515 but as you can see they are still below 1%.
If you would place the current interest rate with a high 5.7% interest rate which is the 2007 rate prior to the recession that raises the total cost of logistics 10.1% and would change the index as a percentage of the GDP from 8.32 to 9.1%. Interest rates cannot remain at this level for too much longer. Many analysts including myself feel that the economic conditions are strong enough to warrant a straight rate increase by the feds and there has been no clear indication so the decision is data dependent. We have already surpassed a lot of the levels of the Federal Reserve initially said would trigger an increase. The Federal Reserve is meeting now so we should know by tomorrow whether or not there will be an increase. They have surprised us a lot by not increasing when we thought they would.
This is a look at the total inventories broken out into the three components: Retail trade, Wholesale trade, and Manufacturing. All business inventories remain above the recession highpoint despite some draw down near the end of 2014. The average investment in all business inventory increased 2.1% over 2013 and now is at 2.4 7 trillion at the end of 2014. The two sub categories of inventory retail and wholesale both climbed. Wholesale inventories approved by 3.9% while retail inventories only rose 2.3 % over the year. Total inventories grew 1.3% over the year in the second quarter with retail up 2.0%, wholesale at 2.5 and manufacturing 0.6%. All types of inventories are higher than the high point before the drastic drawdown during the recession so you have raising interest rates and higher interest rates will make higher inventory carrying costs and now you will see much lower vacancy rates in warehouses in storage. Leasing rates are beginning to rise because warehouse properties are becoming scarce.
One of the things that you see that I am pointing out right now is in 2008 we saw a point where wholesale trades went higher than retail trade. You can go all the way back to the beginning of the series and retail trade was always higher than wholesale trade. We had a trend that was starting back in 2005 where retailers were pushing inventories back on their wholesalers and manufacturers and they were just carrying at a minimum amount of inventory on their store floors in the back so that is what ultimately gave us this flattening of the retail and the rise in the wholesale. Of course we see the drop in all of the inventories at the beginning of the drawdown after the recession but a lot of this is increased in the wholesale piece primarily just before the recession and after the drawdown is because companies like Amazon are considered wholesalers and we now see their inventory in there where previously we would have seen that more as a retail inventory.
Another troubling sign is that the inventories are too high is that the inventory to sales ratio which has been climbing rapidly since September 2014 and is twice reached 1.37. Wholesalers and retailers are shifting their orders and strategies in 2014 into early 2015 to avoid the West Coast Port issues where inventories and started to pile up. Sales did not materialize as expected or goods did not arrive at the appropriate time and retailers immediately began to discount goods. Consumers responded, retail sales rose, but the goods just kept coming. Paid sales and input inventory turnaround is slow. With inventory at pre-recession levels any further reductions in inventory turns could become a financial drag on the economy. Coupled with higher interest rates and rising warehouse costs, I think companies needs to looking drawing down their inventories to a more sustainable level.
The cost of warehousing rose 4.4% in 2014 and the national vacancy rate dropped to 7%. One of the things that we are seeing in that particular market is that same day delivery models and expanding e-commerce are reshaping warehouses needs, expanding the penetration of warehouse management software to handle many of the tasks, which are beyond what a traditional warehouse used to do and also operating strategies and warehouse location requirements are changing very rapidly. The warehousing industries are also experiencing the same labor issues that the trucking industry is and turnover is high and companies are reporting difficulties in recruiting and keeping their employees. So I think you should expect warehouse costs to continue to rise as they are forced to offer higher pay and benefits to prevent workforce shortages.
Moving on to transportation now here your revenues are what we used to measure the cost for shippers in the logistics model. Transportation costs went up 3.6% in 2014 and almost except air have posted increases. This is a look at total railcar loads and intermodal loads and the cost for rail transportation increased 6.5% in 2014. Class I freight revenue per ton mile rose to 4.054 cents the roads in 2014 to 1.85 trillion. Overall rail traffic was up 4.5% and that is the highest annual on record for a total of 28,376,776 carloads containers and trailers. 2015 is turning out to be slower than 2014 but it is really not a bad year if you look at it and you are comparing it to 2012 or 2013. Most of the headlines we see these days are comparing the 2015 or 2014 and 2014 was a banner year. So it is going to look bad but I don't think it will. Just a quick look here at the carload traffic is the blue line showing 2015 and you will see that it is pretty much mixed there in the middle doing a little better sometimes and doing a little worse but the real story here is looking at intermodal. Again the blue line is 2015 and as you can see the intermodal traffic is doing even better than it did in 2014 which is the red line. So in general rail is doing pretty well and intermodal traffic is consumer goods and where are expecting to see more of the growth.
Moving on to the trucking industry, which is the largest component of transportation cost that rose 3% in 2014. Inner-city truck was 2.7% and the local delivery segment was up 3.7%. The number of track shipments declined. Once again in 2014 truck freight rates did not rise as the traditional demand model would have indicated. We do have a very tight supply and where it is at capacity up we don't see rates rising. On a cost per ton mile basis there was a 2.5% average cost per mile basis it was actually a 2.1% drop in 2014. Truck tonnage is growing and one of the things we are hearing if we are coming out of the recession is that a lot of trucks were moving not at full capacity and we are seeing heavier and heavier loads now.
Again rates are not going up as fast as they really need to support new investment in the fleet and the problems that we have with attracting and keeping drivers. Lower fuel costs this year has actually provided a little bit of a breather but anecdotal stories I talked with quite a few trucking companies trying to figure out why they are not raising their rates and they tell me they go into negotiations for 6 or 8 or 9% and leave with 2 or 3%. Part of that it has not left of their mind five years ago when there was not enough freight to go around so if you have a good customer right now most companies are not willing to lose that customer over rates. So if you are a bad customer and that is not treating the driver well or there is long turnaround times for drop-off and pickup you may not be quite as lucky and you may need to take a look at that. If you are good customers they are willing to hold on rates. Driver turnover is still a problem it was 96% in 2014. LTL was much lower at only 10%. The situation improved dramatically in the first quarter of 2015 with a sharp drop. Truck loaded dropped to 84% turnover that's the lowest since the second quarter of 2011 and the first time it has been below 90% since that time.
This was largely due to the slowdown in freight in the first quarter and probably will go back up when we get the numbers to the second quarter. Again driver shortage, ATA says we are short 30,000 drivers. 90% of carriers say they cannot find enough qualified drivers and our current drivers are leaving because of retirement and also the reduction in pay and productivity from the new hours of service regulations. So again don't expect the driver shortage problem to go away anytime soon.
One of the other parts of the market would look at is the freight forwarding which is done consistently very well throughout the recession and especially coming out of the recession. Revenues for the 3PL sector rose 7.4% in 2014 making it the fastest growing segment within all of the transportation pieces we looked at. The domestic transportation management section has been the fastest growing segment within 3PL for the last several years. It was 20.5% in 2014 and that growth is attributed to our growing base of customers that is using 3PL services as well as increases in the types and level of services that are being offered from that segment.
There are enough uncertainties in the US supply change that 3PL's seem to be nimble enough to be able to change rapidly for those changes. Availability of carrier capacity, changes within the economies of scale, call structures of developing nations, and things that impact of the value proposition for outsource production, supply team and transportation disruption just to name a few of the type of the things that they handle. A lot of the companies that were talking to may have the contracts in place with carriers to move their goods but because of the capacity problem and the expectations that the freight volume will continue to grow, quite a few companies have said that they also would have contracts with 3Pl's and sometimes more than one so that they can guarantee the coverage that they need when they need a truck, slot on a railcar, or when they need container. So that is why that segment of the market is growing so rapidly. The second fastest growing segment is the dedicated contract carrier which increased 10.4% in 2014 and that sector there is the one sector where we have seen trucking companies willing to add to their fleet and the dedicated contract carriage is when a second company Penske for example owns the fleet however they have a contract that is dedicated to a particular customer and that ensures the customer has the trucks that they need when they need them. I expected to see that sector of continue to grow as well as capacity gets tight for both truck and rail.
There are water sector rose 8.9% which is the second highest growth sector in 2014 despite the weak global market shipments especially container shipments, the industry recovered well in 2014. The biggest thing that has happened is due to all of the problems that we had on the West Coast with the labor contracts we saw a lot of shift to using East Coast ports and you will see if you're looking at the first half of this year, but this year that is really confusing for the biggest growth is in East Coast courts and that is imports and our imports having been doing pretty well. The exports are another story. They have been falling or are flat for almost 18 months and that is one of the reasons is the rise in the strength of the dollar that is hampering US export sales because it needs with more expensive compared to items with other countries. Businesses are expressing concern and rightfully so there are corporate possibilities that can be directly related to periods of relative strength of the US dollar. The prolonged strength leads to lower global sales. One of the things we are seeing right now is particularly an agricultural market prices are so low that they are holding onto their crops this year waiting for prices to go back up for the strength of the dollar to go back down. So having a strong dollar in this import is very attractive for us and it makes our export less attractive on the global market.
Let's look at what's going on right now and to do that I have the Cass Monthly Freight Index. The one on the left is a measure of the absolute dollars that have been spent to move freight in each of those months. The one on the right is an index of the number of freight shipments so that doesn't actually reflect the tonnage volume or anything it is just an absolute number. If you can see looking at it for the most part they are still following the seasonal patterns that we have been experiencing for the last five or so years but if you take a look over on the right freight shipments dropped in August which is actually a diversion from the normal pattern we have been seeing for this time of year and that because retailers although they have been stocking up for fall, school, and Halloween very high inventories and the rising of inventory to field ratio slowed their ordering down the earlier this year so you will see smaller shipments now but that does not mean that the appropriate goods are not actually on the shelves.
So let's look at 2015 so far. GDP growth estimates were revised upward to the second estimate for the second quarter at 3.7% and estimates for the first quarter were a positive 0.6% and if you knew the first quarter estimate was actually declined and one of the things in both quarters that is accounted for the upward revision is actually consumer spending. That accounts for two thirds of the US economic activity and has been growing at 3.1% rate. With the consumers back in the game, we are starting to see the economy really strengthen and build a strong sustainable growth. Maybe not as strong as you saw last year but it is a lot more sustainable. The August PMI or Purchaser's Management Index fell 1.6% and it has been growing for last couple of months. The troubling things are that new orders are down 2.9% while production fell 4.3% and there are consumer goods that are included in the declining industry but it is hard to tell if that is a sign of a weakening demand or simply the fact that there is plenty of inventory out there to satisfy consumer's needs. So I am not concerned about that at this point. New export orders dropped 3.2% as the goods continue to be relatively more expensive in the world markets. Also the economic difficulties experiencing in China has reduced the amount of exports that we have been shipping to them and that they are our largest trading part there outside of the North American training partners. Food and beverage exports and non-metallic minerals are the strongest exports at this time. On the positive side the backlog of orders grew 9.4% which has increased in textile mill products, paper products, computers, and electronics. These are all things that we generally thought of them buying. Most of the decline has been to durable goods and again I think that is another place where we have relatively high inventory also including transportation equipment and machinery. Then the Conference Board Consumer Confidence Index rose 11.5%. The present situation in depth was buoyed by stronger labor reports and it is just a little bit last month and that uncertainty seems to have evaporated. July retail sales jumped as consumers continued to open their pocketbooks looking for a bargain. Retailers were hoping for a little bit more of an increase as little as gas prices for a little bit more money in everybody's pockets. That didn't happen. Consumers are still being very careful. They are not extending their credit but they are starting to buy more things than just necessities.
One of the things we saw is that trucking failures fail by almost 90% in the second quarter of 2015 compared to 2014. A lot of that is fuel prices and some pretty stable rates helped. So my read on things is that things are continuing for the rest of the year to be slower than they were last year but still much better than we have seen in recent years. I think the transportation logistics sector still has a lot of headwinds in the global market and new regulations and the inability to put drivers in seats and keep our warehouse workers, but I think it is going to continue to strengthen and I do think one of the things that has to happen is we need to see more sustained growth at the level that we had last year so we can give trucking companies the courage to raise their rates and stick by it because they are operating on very thin margins. Not having enough traffic to go around in the very recent history is still having a very profound effect on everybody's decision-making. So what do I think is the greatest threat to freight logistics as we finish 2015 and go onto 2016 is capacity, capacity, and capacity? That holds true to everything from the infrastructure to the equipment as well as the people that we need to operate that. With that I will turn it over to the next speaker.
Nicole Coene
Thank you, Roz. We will now move on to Emily Feenstra of the American Society of Civil Engineers.
Emily Feenstra
Okay thank you for including me as part of the discussion today. I am here representing ASCE, the builders of the infrastructure and what I will do is give a brief picture look at the state of our nation's infrastructure focusing on freight and the best indicator that we have to do that for current infrastructure conditions is our report card that you might be familiar with. We release the Report Card for America's Infrastructure comes out once every four years. Today I will talk about some of the highlights from our most recent version which came out in 2013 and it is a snapshot in time which tells us how we are doing with conditions and funding needs. Also what we can do to raise the grade.
So here you see the 16 categories of the infrastructure that we evaluated in 2013. You will see that we have an overall grade in 2013 of a D+. While that is not a grade you would want to bring home your parents the good news is that it actually rose slightly from a D in 2009 and there were six sectors that saw improvement project. You can see the red arrows are the areas that rose in 2013. We really thought three reasons for the rise in grades. One, we sought greater private investment in several of the categories such as energy and rail. We also saw a lot of targeted efforts to address infrastructure deficiencies by cities and states in categories like roads and bridges. And also several categories if you know were looking at 2009 to 2013, several categories benefited from the short term stimulus federal funding.
Still we know that a D+ means we can do better if we are going to continue on our trajectory of economic growth. So what we thought is that a lot of categories of infrastructure across the nation are simply aren't seeing the improvement in day-to-day input performance to save money in the long term and you see a lot of backlog of projects to maintain and modern days our structure. Two of the categories that we evaluated here received nearly failing D- grades. That was a levies and inland waterways. The other big news that comes out of our report card is these investment needs that you see here in this chart. I will point out a couple of things for you. In 2013 we faced a total investment need of 3.6 trillion between 2013 and 2020 across the 16 infrastructure sectors. We are already prepared to invest about two thirds of that amount but we see a funding shortfall of 200 billion per year and that is the number circled in the far right-hand corner. That is actually a slight decrease from four years ago. A few other things to note from this chart, surface transportation you will see the top row there has by far the largest funding gap at fewer than 846 billion per year. You also see that there is a great deal of funding set aside already. On the other hand water and waste water has a much smaller total findings shortfall but their actual shortfall finding covers only one third of the total need. We are assuming here that this is the total investment needed to get to a grade of B or a state of good repair so we are not talking about the investment total these are actually putting conservative. We are not talking about gold plated infrastructure, free-flow traffic; we are talking about a grade of B.
I just wanted to highlight a few of the categories that pertain to the freight sector the grades that you see. I will start with inland waterways with a D- and as you know the inland waterway system is the hidden back bone of our freight network and carries the equivalent of the 1 million truck trips per year and it is an antiquated system. We have more than half of the locks across the country are over 50 years old. The number of unscheduled service interruptions per day is averaging 52 and if you look at the schedule of projects that they have on the books currently the Army Corps stretches out to the year 2090 so there are some huge needs in the inland waterway sector.
Moving onto ports. Ports we evaluated for the first time in 2013. We worked closely with the Americans Association of Port Authorities and debuted with a grade of C. Not surprisingly it is tough to get information from the terminal facilities themselves and what we focus on this category was a lot of the land side and waterslide connections to those ports and improvements that needed to be made but we note that 95 5% produced and consumed by the U.S moves through the ports. We heard some interesting Port statistics earlier about the number of imports but we know that they are planning a lot of improvements underway especially with the Panama Canal expansion coming up. As of 2013 we knew that they had 46 billion at least in capital improvements planned at several ports from now until 2016 so a lot of investment is going on but the roads and the connections surrounding the parts are in need of upgrades.
The roads category roads and bridges actually the last three categories improve slightly from 2009. The roads category we know capacity is an issue for our roads. 42% of major urban highways remain congested and that cost the economy 101 billion in wasted time and fuel annually. We did see an improvement in pavement conditions from some of that federal funding that I mentioned earlier.
Bridges the number of structurally deficient bridges is on the decline. Currently one in nine are structurally deficient. That number is decreasing but the one caveat we have here is that the number of bridges serving large urban areas that are structurally deficient is on the rise. There is over 200 million trips taken daily across these deficient bridges.
Finally rail was our most improved category in 2013. It rose from a C- to a C+ and the story here is really we saw freight rail taking advantage of the economic downturn in 2009. To renew a lot of the rail tracks and they took advantage of less traffic on the tracks to replace or renew 3100 miles of tracks, the equivalent of going coast-to-coast and they increased their investments during this economic downturn to a tune of 75 billion between 2009 in 2013.
Another thing that we did in conjunction with report card, we are engineers not economists but we worked with the economist firm called the EDR Group out of Boston and we wanted to answer the question that we got a lot which is "So what that we have a D+ what does this mean for our country if we are lagging in the C's and the D's?" We worked with the EDR Group to come up with what we call the Series of Failure to Act Economic Study. What they did is they looked at the opportunity cost if we keep going within current investment levels for our major categories in the infrastructure. We looked at 9 of the 16 categories of infrastructure on the report cards those included surface transportation, airports and waterways and a lot of the categories that we are talking about here today were included in that study. What impact does this have on the larger economy?
We know intuitively that we are connected by infrastructure and that's consequences of these issues play out every day whether you are sitting in traffic or power outages or leaky water pipes these things do cost money. We are able to quantify that. Here are three of the final statistics from our summary study that looked at all nine categories together. We found that if we just continue on the same path of investment levels for these categories in infrastructure we face the following effects by 2020. The projected loss of 3.1 trillion in GDP, a loss of 3.5 million jobs in the year 2020 alone, and a drop of 3100 in disposable income per year per household. Important to note we are not talking construction infrastructure and civil engineering jobs we are talking about a ripple effect throughout the economy and a lot of major industries and actually when we look at transportation specifically one of the only sectors that benefited was auto repair from the poor roads.
Looking at the port category specifically this is one report and what I just shared with you was the final summary report, but I just wanted to peel back a layer and talk about the port and inland waterway sectors. Failing to meet the 16 billion investment gap for inland waterways impacted our economy in multiple ways. US companies shipping goods to market would experience congestion and delays leading to higher transportation costs ultimately causing the price of goods to rise and that if the price of goods rises we become less competitive in the global marketplace resulting in a 270 billion decrease in exports by 2020. Is this productivity will fall, our GDP will plummet by 697 billion by 2020, and at a time when job creation is vital to economic recovery America will failed to create 738,000 jobs in the year 2020.
Disposable personal income will fall by 872 billion which equates to $770 or year per household just looking at ports and waterways. I just pulled one table here from our transportation economic study and that gives you an idea as conditions deteriorate what that does to the cost to American's and if any of you have been following the discussion with the Highway Trust Fund and see a short-term extension and what they do to our economy this is a table that we like to bring up a lot. The year 2020 is not that far away so we did the study back in 2011 and you can see the cost exponentially rise as we get further and further behind with these backlogs of projects.
So finally I just wanted to touch on why we do the report card as a civil engineer? We like to think of ourselves as stewards of the nation's infrastructure but overall the point of the report card is we have had good infrastructure for so long in this country it is almost become an invisible part of our society. We assume it will be there and it will work and of course until something goes wrong. Much of our infrastructure is reaching the end of its useful life and there is a lot of work we need to do to keep up our services and stay competitive. The purpose of the report card for ASCE is to explain in a simple way to the public, legislatures, and the media that the infrastructure that we use every day benefits from needs to be a higher priority and how do we make infrastructure a visible priority in today's hectic world? Our strategy is with a report card is to do three things: use our expertise to inform legislatures and elected officials about the infrastructure funding gap, to talk about the economic consequences of doing nothing, and remind the public about how much infrastructure the use every single day. So with that I conclude and I am happy to take questions or if you can think of anything afterwards we have an email or phone number here as well. Thank you.
Nicole Coene
Thank you, Emily. We will now move on to Andy Moses of Penske Logistics.
Andy Moses
Thank you Nicole I appreciate the introduction. Thank you Roslyn and Emily for your presentations so far. I will try to round out the discussion by bringing some commercial perspectives to what you have heard today. So let me start by explaining a little bit about the Penske organizations for our audience. I am with my 30th year with Penske in our truck rental and leasing operations and in our logistics business. Penske truck leasing operates a fleet of trucks and we operate 226,000 vehicles operating on our highways and bridges seven days a week. So the state of the roadways and the infrastructure in this country affects our fleets in many tangible ways. For example we have about 100 associates in the call center around the clock responding to emergency road service requirements related to our customer's vehicles. The number one reason for calls year in and year out is flat tires so needless to say we have experienced the infrastructure every day. Now I would like to speak about Penske logistics and how some of these trends affect us in our capacity as a 3PL provider. I will also touch on the impacts felt by shippers we serve in North America and around the world. Let me start with dedicated contract carriers which Roz mentioned as one of the segment today. Penske operates as a dedicated contract carrier and we have more than 4000 drivers on the road every day. The greatest challenge we and others like us face in finding and retaining safe drug drivers. That is order of business number one and I think Roz did good job of establishing that.
While it can be a complex issue, one key focus area includes quality of life for drivers. So road congestion add stress and aggravation for drivers and depending upon how they are paid it can impact their effective hourly wage so when drivers are considering among various potential employment opportunities maybe that is one of the things that influences their thinking. When we design a fleet operation to deliver medical supplies to hospitals or it make be fresh-baked goods to a convenience store, we are engineering these activities with traffic and congestion in mind so a lot of our work is done off hours when consumers like each of us on the call today are not on the roads. This year's report also highlights strength in industrial production so I will talk about our transportation management business. We feel these rising volumes in our TM business where Penske manages freight across all modes on behalf of the large shippers we served. In this business is segment we rely upon third-party carriers to execute pickup and deliveries often with time sensitive materials to meet production schedules. This is the back bone of our nation's manufacturing activities. The plants we serve operate on just-in-time basis and delays can cause a downstream significant impact. Roz mentioned the critical nature of crate freight capacity. These days capacity is so tight that carriers are challenged to keep up with demand. One way to create capacity is to improve the efficiency of operations. Regulations and the state of the infrastructure have a direct impact either negatively or positively.
Last year the industry faced headwinds in this regard as congestion at ports for example created a ripple effect on supply chains adding uncertainty which is good for no one operating on the schedule. On the shipper side we liability is a big issue. When capacity is unreliable or unavailable, then logistics teams are not working on the myriad of improvements projects that they are responsible for. They are spending their time chasing trucks that is finding trucks to cover their loads. Having a high velocity operating environment where things run smoothly and efficiently, that is when logistic managers can focus their time executing the various improvement projects which is good for the shipper and the economy as a whole. One positive note I will add is that the moderating price of fuel has put a smile on the faces of some of the logistics managers who are out there trying to meet a budget.
Finally I want to say a few words about e-commerce. The acceleration of activity in this area is having a profound impact on the logistics of network. Home delivery of groceries as an example is putting more trucks in residential areas. We are seeing a high frequency low volume becoming more the norm. I will use my own mother as an example who lives in New York City and she is a member of Amazon prime and she jokes that they will deliver a single toothbrush within a couple of hours if she needs one. All of this has meeting within the warehouse so warehouse operators are challenged in terms of having the right technology and the right training for associates on the warehouse floor. While we are talking about warehouses I can validate another finding in this year's report that warehouse vacancies are down. There has been significant tightening in the market and this is carried over into 2015. I wanted to talk about logistics cost as a percentage of gross domestic product. People here in the states needed to realize we have one of the best maybe the best logistics infrastructure in the world. This is evidenced by that 8% figure again that is logistics costs as percent of GDP that is referenced on the chart.
Most of developed nations are well above the 8% nature often in the 10 to 12% range. They are above it as they lack things like our interstate highway networks and the investments we have in our rail and port infrastructures. So while this is an advantage we enjoyed in this country it is one we can't let it slip away. While issues related to capacity and infrastructure are challenged these challenges affect Penske and all of our three competitors equally. So from a competitive perspective we don't wake up advantaged or disadvantaged against others offering similar services. However, when you look at this on a macro basis thinking about our overall economic efficiency as a nation then yes, solving our infrastructure problems should be important to us all.
As our infrastructure ages, this adds cost in terms of times as routing efficiencies are lost when key roads are under construction for example or closed and thus impacting our routing plans. It also cast adds cost in terms of equipment specifically the additional cost of repairing equipment. All of these costs find their way to the prices we see so the everyday items we all consume. Another clear trend addressed in this year's estate of logistics report is the acceleration of outsourcing act to these shippers, 3PL's, or third-party logistics providers. You can see from looking at the chart that the rate of growth in the outsourcing of logistics activity exceeds the rate of GDP growth so we feel safe in telling our employees for example that they are part of the fast-growing market and career opportunity. Speaking about Penske specifically I can share that our revenues are up over 10% year-over-year with a healthy rate of growth for a company like ours. So it terms out that capacity while he could create challenges for shippers that can be good for those who are aggressive and opportunistic. Shippers are rewarding folks who can overcome these challenges. Regarding capacity challenges and specifically we work with carriers and shippers to remove shipping points that affect productivity. Then there is Penske operating as a carrier ourselves and I have to come back to hiring and retaining drivers. As a carrier we can succeed in this regard in being an employer of choice for good-faith truck drivers. One of the things we have done is adjust our engineering practices.
Overall truck drivers would be out several days on a given trick now we are designing our networks with more driver domiciles and trailers are relayed through multiple points so freight still moves as fast overall but driver routes are shorter and the drivers are home maybe not every night but certainly more often. I will close by giving our audience my view of the market today. Specifically with this increase in all of this outsourcing activities what specifically is causing shippers and what shippers are looking for when they choose a 3PL. I see it boiling down to a handful of things. The first is scale. At the end of the day we are talking about taking on big challenges faced by larger shippers and that takes scale and resources, uninhibited access to capital facilities equipment are a must that's having the ability to leverage a network investments previously made to drive benefits to the shipper so scale is a key enabler to making a big difference is a logistics provider. Next I will talk about organizational depth. The success of shipper and provider arrangement hinges on the skills of the people committed to the cause. So it takes excellence and HR in recruiting and training and having a branch strong enough to attract the best people it is not the more truckers we need but the more skilled workers to do the best as our economy grows. It is excellence in those areas that allows providers to face highly qualified people into service on behalf of the shipper. The ongoing investment in this can allow improvements to continue. I will touch on technology next. When I think about a logistics provider stepping up and making an impact on successful deployment systems this includes transportation management systems, labor management systems, and large management systems that can be amazing. It allows resources to make technology projects happen on timelines and serving shippers who are tackling big opportunities. I will also touch on industry vertical expertise. On the domestic side we are in a fast-growing economy and time is money. Having a logistics provide with resources and experience with a track record in implementations with deep expertise of the myriad of highly specialized niches within the specialized type for example food, beverage, grocery, automotive or retail, these hours surely drivers for the selection process for the shippers.
Next I will talk about execution at the end of the day what the shipper looks for is the ability to drive execution which tends to be easy to measure with the right set of key performance indicators. As previously stated you have to have the right resources, the right people and the right systems. While we talk about execution was shippers this is where it all has come together. This is the domain of process but it is really more than process it is about process and commitment, the commitment to get things done and to drive resources. And last but certainly not least culture is a big part of successful arrangements between shippers and providers. It means having the ability to navigate together in this fast-changing environment in which the shipper operates and it certainly means having open and honest communication. So that is my quick take and I will turn this back over to Nicole.
Nicole Coene
Thank you, Andy. I'd now like to start off the Q&A session with the questions posted online. Once we get through those questions, if time allows I'll open up the phone lines for questions. If you would like to ask a question over the phone please press * 1 on your telephone keypad and that will put you in the queue to have your phone line open. The first question we have is why isn't e-commerce lowering warehouse cost?
Roz Wilson
E-commerce isn't lowering warehouse cost obviously because we still have to have the items in. The warehousing costs that are getting lower it is actually lowering retail costs because you don't have to have the retail storefronts but because e-commerce actually has a different set of rules associated with it because of the Amazon reality it is actually almost more expensive when you have to have the top-notched software in order to be able to get that same day next day two day delivery that everybody expects these days so that is why the placement of the inventory and where the warehouses are located there is a lot of things going on as a result of e-commerce. We have also got at the same time something going called Omni-channel where we have the same inventory that used to be, you would have retail inventory and then if you had a catalog or you could order something obviously I'm talking way before emails you had a separate inventory to fulfill that now we are looking at a single inventory to fulfill what we need to have in our retail as well as what is being offered to e-commerce. You can go into a store now and if that they don't have the item in your size you can essentially e-commerce it right there in the store and have it delivered to the store or to the house so there is a lot of different things going on with that and it is actually adding costs rather than reducing costs in terms of the warehousing piece.
Andy Moses
And I would add that from a labor expense perspective as you get into frequent picking inside of a warehouse environment a very small quantity then your cost per item goes up significantly so if you were to go back a few decades and a carton or a pallet of hoodies or something that kids where would go into a Sears store and you would walk in and find one and pull it off the rock rack. Somebody would take that pallet of next number of items is so today you have someone going up and out I'll picking one to fulfill your order so it has a tendency to drive some additional expense within the warehouse.
Roz Wilson
It also raises the cost to ensure quality.
Nicole Coene
Thank you Roz and Andy. Another question is can you explain to the attendees why truckload driver turnover rates are typically much higher than less-than-truckload driver turnover rates?
Roz Wilson
This is the sort of thing that Andy was talking about that they are trying to do with their drivers. Typically less than truck load drivers do have they are home more often and they are often what they are doing is a more regional thing rather than a longer haul things so that also includes a lot of the local delivery types of things. You can see a more desirable but particularly today more things that people would like to see in a truck driving job so there just isn't the same turnover. Also with the truck load there is almost a bidding war for the most qualified drivers with the least black marks and because the hours of service changes that have reduced the productivity and pay you do see drivers jumping for another dollar here or another change in benefits there and what we are seeing is they are not actually leaving the market they are jumping to another company.
Nicole Coene
Thank you Roz. A question for Emily is in looking at last 10-20 years, what transportation infrastructure segments have experienced the most improvement or the biggest decreases in infrastructure quality?
Emily Feenstra
Thank you and that is a good question and I think I would have to go back to do a 10 or 20 year assessment to be sure but my initial thoughts on that are I think we have seen a lot more attention focused on bridges and if you think about that just for better or worse when you have the Minnesota bridge collapse all eyes were on the number of structurally defaced deficient bridges in our country. There are efforts to address these bridge issues as one example. Another area we have seen conditions worsen a bit is in the transit category and a lot of these transportation sectors we simply built our infrastructure quite some time ago and the bill is all coming due around the same period of time. So we are facing a lot of issues throughout the sectors but it serves as gradual deterioration over time rather than a dramatic shift.
Nicole Coene
Thank you Emily. Andy has a question for you. Does Penske reimburse long-haul drivers for service hours at electrified truck stop spaces (drawing on shore power or full-service HVAC) and/or overnights at motels (is that what you mean by "driver domiciles"?)?
Andy Moses
Typically in the industry you have your sleeper type tractors in which a driver might the other on the road in a sleeper type unit for multiple nights and yes there will always going to be appropriate compensation for their activities while they are out. Some different carriers handle that different ways some after certain numbers of nights will pay for a motel etc. What I was referring to with domicile would be the practice of every 200 or 250 miles having locally based drivers, for example if you are moving freight from Central Michigan to Chicago and then come home. And then another driver who lives in this space in Chicago take that freight out to its ultimate destination so in that matter we are able to engineer activities that result in drivers being home more often and it is a big deal because folks are concern with quality of life issues such as being home and enjoying time with their families.
Nicole Coene
Thank you Andy. To anyone that would like to ask a question over the phone, please press * 1 on your phone keypad. Andy I think this question is directed for you. What are the most important KPI's for 3PL's?
Andy Moses
Yes so key performance indicators are always important in a supplier shipper type relationship as it gives you the means as your success back and forth so KPI's will tend to vary but certainly in any transportation related endeavor on time, is always going to be a KPI. It may be measured differently in certain types of transportation some of it may be where your tolerance may be broader or narrower in terms of defining their time about what you are doing. Typically you are going to have some measure of productivity in terms of a cost per piece or unit of measure. It could be your cost per carton or pallets per mile it just depends on the nature of the type of operation you are part of and typically will have some measure of completeness of orders so in the warehouse environment your percentage of orders would be a fairly common measure and damage free so ultimately what percentage of your product is getting to its destination in a damaged free fashion. That is a thumbnail sketch but there are others and sometimes quite a bit of time spent designing the right set of KPI's.
Nicole Coene
Question for Rosalynn. A short news item in the paper recently indicated that air cargo volumes have declined and thus stirring potential worries about international trade. Much of the decline in air cargo volumes appear to be in the transpacific markets, especially China, and appear to suggest lower peak (pre-U.S. holiday) volumes than in previous years. Do you see any significance in this recent news item in terms of implications for international trade? Or is this mostly related to slower exports from China (and a slower Chinese domestic economy)?
Roz Wilson
Well to answer the question from the bottom up, the slower Chinese domestic economy has a lot to do with the fact that globally exports from China to the rest of the world are down because demand is down. That includes US demand being down but as I said when I was talking about the inventory piece, I don't think the fact that new orders are down is a true indicator that we are expecting to have a slower holiday season. I think it is more of a reflection of the inventory that we have on hand. Remember that using air except for really expensive or lightweight items is not the traditional mode of choice if there is no disruption of elsewhere so say with container shipment and now that the West Coast has been cleared essentially or as close to it you see much more coming to the East Coast port. You're not seeing any difficulty in getting the goods here.
There are still plenty of time because this is not the time when we would normally see an increase and the trend has been in recent years for a decline in the use of air as a mode for moving cargo unless there has been a problem and had to do with the increase in the cost of fuel and increasing rates and now we have lower fuel which should make things more attractive. The one place we did see an increase in air cargo was the list the garment industry or the clothing industry that had a lot of yet good sitting on ships that were anchored out off the coast of California were flying in their newer inventory and the older inventory when it finally arrives will go directly to discount. Again it is something that you use more when you have a disruption and we are not experiencing that right now.
Nicole Coene
Thank you Roz. What about dedicated routes to improve intermodal i.e. Port of Miami Tunnel megaproject? Do you have any comments on that?
Emily Feenstra
This is Emily and I will say I think that is definitely part of the solution and we highlighted the Port of Miami project as a success story in our 2013 report card. We like to find examples in every state where there are projects making a difference in intermodal improvements and are critical for the core sector.
Andy Moses
I would like to add that that intermodal is gaining acceptance among shippers and it is still modest as a percent of overall freight activity and what shippers are looking for are more reliable opportunities within intermodal that make sense.
Roz Wilson
The other thing they have to look at when you look at something like a dedicated facility most of the ports that we have, high-volume ports don't have the real estate to be able to do that.
Nicole Coene
Thank you everyone. We are coming to the end of our questions and so if you have a question please type it into the chat pod or press * 1 on your touchtone keypad. Do the speakers see the widened Panama Canal as contributing toward more regional and less long haul freight efforts?
Roz Wilson
I am not certain how the Panama Canal would contribute to more regional. The point is to have a way to get the new container ships through. I am not sure that it is going to contribute any more regionally. I think it may change the rankings of importance of certain ports on the East Coast and in the Gulf.
Andy Moses
Theoretically some freight would travel shorter distances once it arrives domestically given more practical options that come in East versus coming in West so it remains to be seen.
Roz Wilson
Yes it will depend a lot on what those fees are because of these have looks pretty enormous.
Nicole Coene
Thank you both. Jocelyn Jones would like you to make a pitch about the value of public sector participation in CSCMP local roundtables.
Roz Wilson
Yes we have local roundtables spread throughout the entire country and Chip Millard who is on the call right now is a shining example of public sector participating in the CSCMP roundtables. It is a very good way to get together with local people that are involved in transportation and logistics and sharing ideas and in Chip's case pulling together panels like this because you have access and it is amazing the type of things you can learn from exchange back-and-forth and I have been pushing very hard for more public/private sector cooperation in terms of data and measuring and KPI's and all those sorts of things. I think it is very important that the private sector be involved in this not only for the public sector doing but it would be helpful for the folks in the public sector who are trying to serve the public the sector and tell them what kind of problems we have, what solutions we have, and the way things are installed are actually working. So if you need help finding a roundtable to go to: https://cscmp.org/roundtable/find-your-roundtable-na, and click on Roundtable. This will be one of the things you can find in the round table and the schedule of the upcoming speakers.
Chip Millard
This is Chip Millard and as Roz alluded, I figured I would mention something I would agree with what she just said I think there is real benefit for people that are if there are roundtables in your region and you are very interested in and want to become more knowledgeable about freight transportation issues and transportation logistics is to attend the events because there are benefits in understanding what the private sector needs are. I would concur with Roz that it is beneficial from the public sector's standpoint to have the private sector understand what the processes are and have greater public partnerships. I would concur with a lot of what Roz had to say and I know there are other people that ask the question they are also very involved. So if you are not involved I encourage you if there is roundtable in your region to check them out and learn more stuff that is going on in freight transportation. Often times there are tours and there can be warehouse facility tours. There are a lot of transportation experts out there and a lot of different things that will allow you to get a better understanding about the supply chain management.
Roz Wilson
And from the opposite point of view having been in the position of trying to put together the speaker lists knowledgeable folks that can talk to the some of the programs are very valuable people to an individual roundtable as well.
Nicole Coene
Thank you. The last question in the chat box is, is there evidence that lower fuel prices have made supply chains longer?
Roz Wilson
I would say no. I have not seen any indication of if anything growing. We have a lot more companies that are opening their length of their supply chain and right now I think lower fuel prices are honestly giving everybody a little bit of breathing room and are not being factored into now I can stretch my supply chain event the further. That is sort of moving in the wrong direction.
Nicole Coene
Thank you Roz. At this time I would like to thank you all for attending today's seminar. The recorded version of this event will be available within the next few weeks on the Talking Freight website. The next seminar will be held on September 23 and the topic is MAP-21 Freight Provision - Status Review and Discussion. Registration is available now and the link is provided at the top of the chat box. In addition, the announcement is available for download from the file download box. I encourage you to join the Freight Planning LISTSERV if you have not already done so. Again thank you to our speakers for presenting and thank you to everyone else for attending. Have a good day.
