Uncertainty continues over what sequestration will mean to
the US economy. Despite this, companies that provide services to the US
government have been feeling the effects of federal budget cuts long before
sequestration officially began. Much has been written about the effects on
major contractors such as Lockheed Martin, Raytheon and Boeing but how will
budget cuts affect logistics and transportation providers?
Although the impact is not quite known, it is probable there
will be some negative effects for logistics and transportation providers –
particularly for those with a focus on the US Defense department.
The buildup of troop involvement in the Middle East proved
financially beneficial for providers such as FedEx, UPS and others. In
particular, Menlo Worldwide Logistics, who since 2007 has managed the US
Department of Defense US Transportation Command (USTRANSCOM)’s Transportation
Coordination Initiative (DTCI). The initiative was designed to save the
Department of Defense’s transportation expenditures through consolidating and
optimizing of freight movements by a single provider. Menlo is responsible for
coordinating and determining the appropriate mode of transportation and
arranges, controls and monitors freight shipments within the US.
The majority of FedEx and UPS’ exposure to the US Department
of Defense is from USTRANSCOM. Because of escalating troop withdrawals from the
Middle East, there have been year-over-year declines in contracts under this
program. According to the website, USASpending.gov, a website that monitors
government contracts, between fiscal year 2011 and 2012 (periods ending
September 30), the value of USTRANSCOM contracts declined over 50% for FedEx
while UPS’s portion declined almost 14%. However, both companies remain active
in spot bidding for one-off projects which are not tracked in public databases.
Besides managing USTRANSCOM’s DTCI, Menlo also manages
warehousing throughout the US on behalf of the US government, much of which is for
the Department of Defense. It has also been successful in additional contract
gains from the Department of Defense and noted a slight increase between 2011
and 2012. The majority of these gains were in combination with other companies
such as Royal Dutch Shell and Health Net Inc.
Still, providers such as FedEx, UPS and Menlo also have
contracts with other US government departments such as the Department of
Justice, Treasury, Transportation and Veterans Affairs. Although FedEx has
provided domestic air express for the US Postal Services’ first class mail for
quite some time, this $1bn annual contract is not considered a government
contract and is currently under review for renewal.
Many logistics and transportation providers offer
specialized services to the US government. While government service offerings
do not comprise a significant percentage of major logistics providers’ overall
revenue, it does affect the smaller provider and the consequences of these
budget cuts could quite likely result in some of these to cease operations.
As government budget cuts intensify, there will be cuts and
modifications in transportation and logistics spend. Still, these services will
continue to be needed but costs associated with the likes of these will be
monitored closely as the fiscal belt tightens and more emphasis on a leaner
supply chain is embraced throughout the entire US government.
