At first glance, it seems to defy the laws of supply and demand.
According to sources here and here, 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 (you can read a great summary here). Put simply, even though there is more demand, there is also more supply — too much supply — and that’s driving prices down.
Figuring Out the Pricing Paradox
Having thought a lot about this issue, we at CoLoadX have an alternate explanation, 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. So everyone is 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: This is just one example of the many complicated factors affecting the cost and dynamics of your logistics chain. 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. Stock trading has become dominated by algorithms, which allows millions of trades to be executed every second. Profitability depends on it, because stocks trade in a dynamic market, where price, volume, and direction are always changing. Is it really that different from logistics? Capacity and freight are commodities, and increasingly they are changing on a real-time basis. You and I can try to understand and anticipate trends, but our human minds can’t outsmart them.
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.
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