Seems like a simple question: are logistics costs going up or down? And I know the answer:

Yes. No. It depends.

In November, we ran a piece on the annual Establish Inc./Herbert W. Davis and Company report, presented each year at the CSCMP conference, that summarizes data on logistics costs culled from the company’s benchmarking database. This year, as we noted, the study found logistics costs were down on average both as a percent of sales and in cost per hundredweight.

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We received a handful of emails saying “No way!” Most responders cited the significant increases in fuel and transportation rates.

All which got me thinking, doing some research and talking to a few friends and experts. More than we can cover this week, but it's a start.

At a macro level, as captured in the Annual State of Logistics report sponsored by CSCMP, there has been a steady decline in the cost of logistics as a percent of overall U.S. GDP.  This year’s report found that in 2004, logistics costs as a percent of GDP were 8.6 percent, the same as 2003, but down from 10.6% as recently as 1996. In fact, logistics costs in 2004 did rise considerably, but basically in line with GDP growth.

I’m in a dialog right now with the report’s author, Rosalyn Wilson, around a couple of issues, specifically how the growth of services (e.g. financial services) as a percent of GDP might be impacting logistics share of the total (i.e., services often have e little or no logistics costs), as well as how the tremendous growth in offshoring might impact the numbers (e.g. are international logistics costs, especially if reflected in product price, included in the model?). More on this soon.

Also at a macro level, there is just no question that inventories relative to sales appear to be at historically low levels, and have not risen during the economic recovery the way they have traditionally. In November, 2005, for example, across manufacturing, retailing and wholesaling, inventories were down to a safety stock level of about 30%, down from about 50% in 1995, according to government statistics. Manufacturers were holding only 20% safety stock, on average, in November. Yet, there is also other evidence that says the growth of offshoring with its longer cycle times and uncertainty is increasing inventory levels.

Our readers, however, are undoubtedly more interested in company-specific data. And here’s where it gets tricky. You can measure logistics costs in multiple ways:

• In absolute terms
• As a percent of sales
• As a percent of some constant, such as cost per hundredweight or per unit/case

It’s the percent of sales that is especially tricky, though probably of keen interest to many company execs. But that ratio is of course enormous impacted by what’s happening to the prices a company can charge.

I spoke for a couple of hours this week with Bill Drumm, CEO of Establish, in part discussing some pushback on the report’s finding that on average logistics costs as a percent of sales declined 9.6% in 2005. As Bill noted thoi though, logistics costs were up significantly – but so were sales and prices, especially in certain industries.

Nestle’s well known Joe Lombardo wrote us making this very point: “Are logistics costs falling as a percent of sales because of sales price increases?  Some manufacturers seem to have limited pricing power due to energy and commodities price increases.”

Bill Drumm added: “If you were in certain sectors, such as metals or oil, where the market prices have been skyrocketing, your logistics costs as a percent of sales would have dropped substantially regardless of what was happening in the transportation market.” As the Establish database is made up of company’s from dozens of sectors, and only a total respondent view is presented at the CSCMP conference, those with less pricing power, such as consumer goods, should recognize the impact on the total of some of these other sectors. (As a note, companies which put data into the Establish logistics benchmark tool receive more specifics around their high-level market sectors, and more granular comparisons can be done as a consulting engagement.)

There are plenty more issues, such as: What’s included in logistics costs? (e.g., are inventory carrying cost included?); What is your business strategy? (e.g., a company that has a strong focus on customer service may incur some higher costs than one that is less focused).

There’s lots more -  we’ll cover this subject again in two weeks. For now, to help sort through some of this, we have a short, and anonymous, logistics costs survey. It will just take you a couple of minutes, and we’ll report the results back in SCDigest soon. Please click here.

How should a company think about logistics costs? Do you think they are rising for most companies? Or are supply chain and logistics efficiencies continuing to reduce costs on a relative basis?