Logistics firms could be headed for a tight squeeze in cash flow in the coming years, according to the Council of Supply Chain Management Professionals (CSCMP).
The council just released the 27th iteration of its annual State of Logistics Report, presented this week in Washington, D.C. Written by A.T. Kearney, the report highlights the economic conditions that are likely to put pressure on logistics players, especially when it comes to inventory carrying.
This type of asset-based financing allows companies to use their inventory as collateral when in need of working capital. In recent years, inventory financing has proven relatively accessible to logistics players. But according to CSCMP, the cost of accessing this kind of financing increased by 5.1 percent year over year.
Corporates’ overall financial cost of inventory — the value of the inventory multiplied by the cost of borrowing capital to finance that inventory — rose 7.4 percent, analysts said.
Unsurprisingly, the Federal Reserve’s decision to raise the federal interest rate played a major role in the rising cost of invoice financing, the report said. But there were other preceding factors in this trend, too.
For instance, according to the report, between 2010 and 2014, businesses stocked up on inventory amid economic growth, bracing for increased demand. During this time, inventory levels rose by 5 percent each year. This stockpiling led to the development of “mega-fulfillment centers,” CSCMP said, as logistics companies geared for a surge in business thanks to eCommerce.
And while 2015 saw only a minimal change in inventory levels, the cost of accessing capital — particularly inventory financing — continued to rise.
“It is a dynamic time for the logistics sector — macroeconomy, new business models, technology,” said A.T. Kearney partner and the report’s coauthor, Sean Monahan, in a statement announcing the analysis.
Indeed, CSCMP found, businesses today have significantly more inventory value to finance. In 2009, businesses’ inventory value hit $1.93 trillion in the U.S.; by 2016, it reached $2.51 trillion, the report said, highlighting the demand for companies to finance their outstanding stock.
With logistics costs rising for these companies, the demand for inventory finance balloons.
The report found that U.S. business logistics cost $1.4 trillion in 2015; logistics costs rose 2.6 percent year over year, though this represents significant growth in costs compared to levels seen between 2010 and 2014. Declining fuel costs have helped to stunt the financial burden of logistics on companies, the report added.
Considering these factors, CSCMP has good news: According to the report, 2016 is likely going to play out as a rebound year of “inventory correction,” especially considering the slowing growth of inventory levels. Freight volumes and revenues are also expected to make a comeback this year, it said.
“Supply chain transparency continues to grow in importance for shippers and third-party logistics providers,” said Penske Logistics President Marc Althen in a separate statement. Penske provided top support for the report, the companies said. “This is driving significant technological change for 3PLs and shippers alike, as they collaborate and share more real-time information to enable data-driven business decisions and meet the growing needs of consumers.”
But the cost of invoice financing continues to rise and may be a cause for concern for some organizations that need to finance their inventory levels still bulked from years past. Coupled with ongoing truck driver shortages, declining demand for transportation, airfreight overcapacity and other factors at play, businesses and third-party logistics providers are experiencing a change in how logistics is done and how companies gain the working capital they need to complete the job.