Logistics Industry Mixed as Smaller Firms Face Rising Costs

The logistics industry demonstrated mixed signals across its key indicators, as smaller firms try to hedge increasing costs, according to researchers from Florida Atlantic University and four other schools.

The logistics industry demonstrated mixed signals across its key indicators, as smaller firms try to hedge increasing costs, according to researchers from Florida Atlantic University and four other schools.

August's reading came in at 59.3, a slight uptick from July's 59.2, but far below the historical average of 61.5, according to the Logistics Managers Index. Any score above 50 indicates the industry is expanding; a score below 50 suggests contraction.

Inventory levels (58.2) and Inventory costs (79.2) rose 2.7 and 7.3 points, respectively, as companies started stocking more goods and inventory became more expensive to hold, contributing to August's slight increase. Drops in transportation levels and transportation prices contributed downward pressure to this month's reading.

"Given the fluctuating regulatory environment associated with tariff rates and import duties, it appears that firms are consuming more warehouse capacity, as this metric is approaching contraction, and the prices associated with warehousing are up," said Steven Carnovale, Ph.D., associate professor of supply chain management in FAU's College of Business.

The LMI, a survey of director-level and above supply chain executives, measures the expansion or contraction of the logistics industry using eight unique components: inventory levels, inventory costs, warehousing capacity, warehousing utilization, warehousing prices, transportation capacity, transportation utilization and transportation prices. Along with FAU, researchers at Arizona State University, Colorado State University, Rutgers University, and the University of Nevada at Reno calculated the LMI using a diffusion index.

Continuing the trend observed over the last four months, logistics expansion was being disproportionately driven by smaller firms (firms with less than 1,000 employees). Small firms reported an overall index of 62.7, higher than the 58.2 reading reported by larger firms (firms with more than 1,000 employees).

"Typically, larger firms have higher buying power and can act more quickly and in larger volumes, such as bulk importing of goods ahead of any published tariff rate increases. We saw this activity in previous reports," Carnovale said. "This month's data show that smaller firms are responding to try to hedge cost increases, and this is reflected in their higher overall logistics activity."

The previous gap between upstream firms, or manufacturers and suppliers, and downstream firms, or retailers, disappeared in August, a trend researchers believe indicates better flow through the supply chain. Higher upstream activity with manufacturers and suppliers suggests that the rest of the supply chain will have more logistics activity as products are pushed downstream to retailers.

"The shift to higher activity in the downstream suggests that supply chains might be showing stability, but the higher price indexes may result in increased prices to consumers in the coming months," Carnovale said. "This, coupled with reports of decreased consumer sentiment and spending, needs to be monitored as we enter the forthcoming holiday season."

-FAU-