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Gilmore Says: |
 Perhaps most amazing, transportation costs of a percent of GDP are back where they were 20 years ago, when deregulation of the trucking industry was ushering in years of transportation cost declines. Wow.
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It is time for one of my favorite columns of the year, the review of the annual State of Logistics report, which was delivered by Rosalyn Wilson just yesterday at a press conference in Washington DC.
Very briefly, the report was started in the late 1980s by the late Bob Delaney and sponsored by his company, Cass Information System. Somewhere along the way, CSCMP took over the sponsorship, and in the late 1990s Wilson, who has a long career in the logistics industry, began to support Delaney in his efforts. Upon his passing, Wilson took on the challenge alone, largely keeping the existing methodology.
The headline news: Logistics costs in the US exceeded 10% of GDP in 2007 for the first time since 2000, and at 10.1% matched a level not seen for a decade. A combination of rising fuel costs and rising inventories resulting from a slowing economy and possibly the effects of offshoring drove the number up from 9.9% in 2006.
The report usually includes a theme that provides some insight beyond the numbers. That is largely missing this year, although the report (available at no charge to CSCMP members) has the sub-title of “surviving the slump,” which provides a theme of sorts. Nevertheless, I have always found these themed discussions valuable, and wish that tradition had been continued more forcefully this year.
According to Wilson, total US logistics cost rose 7% last year despite a slowing economy, to just under $1.4 trillion (up $91 billion from 2006). While that 7% pace is down from the prior few years, with GDP growth of just 2.2%, that of course means logistics costs as a percent of the economy rose – just as they have for each of the last five years. To put it bluntly, after almost two decade of steady improvements in logistics costs, we seem to have entered a new era.
As I say each year, I think this 7% total increase actually understates to some extent the cost impact on “product companies.” Meaning, the growth in the US services economy continues to outpace the manufacturing sector. While many of those “services” are related to physical products (retail, wholesale), many are not (insurance, banking, etc.). So, my contention in general is that this overall growth number would actually be higher if you only looked at companies based primarily on physical products.
Driving the 7% rise was a 6% total increase in transportation expense across all modes, which, despite excess capacity and the resulting downdraft on rates, was of course pushed higher by soaring fuel costs.
Wilson also calculates a 9% increase in total inventory carrying costs, which in her framework includes not only inventory itself but total warehousing costs.
With regard to inventories, Wilson makes the case that offshoring is a key contributing factor, with the longer supply chains inherently placing greater pressure on inventory levels.
She also observes that “The significant order lead times required when sourcing off shore have led to a less nimble system that cannot make adjustments immediately,” when, for example, the economy slows. For most companies, there is simply greater decision and reaction “latency” with offshore suppliers.
Wilson also estimates a 9.9 increase in total warehouse operations expense in 2007. She believes that is in part the result of companies moving back to having more DCs to combat rising transportation expense.
Whether all this means good times or bad times for the logistics profession I will leave it for you to ponder – certainly, it puts a premium on talent. That $91 billion in higher costs all went somewhere – at a time when the top line was challenging for most companies.
Perhaps the one main sub-theme of the report is that many firms are taking actions now that may come back to haunt them or us before too long. For example, in the face of lower volumes and fuel cost issues, about 2000 trucking firms failed in 2007, and almost a thousand more in Q1 2008. That is taking an incredible amount of capacity out of the market, and it is not just really small firms. That data is only for companies with over five trucks, and the average number of trucks per failed firm was 45. That number surprised me on the high side.
Further, Wilson says many transportation assets on both the private fleet and common carrier sides are being permanently taken out of the market - likely presaging another capacity crisis down the road. Much equipment, for example, is being sold off to overseas buyers.
“Companies, both large and small, are reducing the size of their fleets. Some are idling equipment waiting for the turnaround, but far too many are either leaving the market and selling their equipment or making strategic decisions to reduce the number of assets they hold in favor of a new business model,” Wilson says. “The bottom line is that unlike previous cycles when a truck was an idled asset awaiting a signal from the economy that it could re-enter the nation's fleet as capacity again, now capacity is being eliminated.”
Some other report highlights:
- Rail capacity challenges loom ahead as well. Rail car demand is expected to double over the next two decade, and there are no clear plans to add sufficient capacity. Rail carriage is “already suffering under the strain of congestion, with trains forced to stand aside for hours because of one-track rail lines.”
- The 52.3% increase in logistics costs over the past five years far exceeds the growth in GDP over that period.
- Inventory management gains have stalled at a macro level. The inventory-to-sales ratio across the economy, after years of decline, has stalled and even risen slightly over the past three years. (Note, this may in part be offshoring, in part the logical trade to hold more inventory and reduce transportation costs to optimize total costs).
- Some companies are looking at providing transportation to get workers to distribution center jobs. Others are looking at longer shifts and four days on, three days off schedules.
- The truck driver shortage has ebbed a bit of late, largely due to the movement to driving from workers losing jobs in the shrinking construction sector. That trend too will again reverse itself.
- Booming exports have been a boon to east coast ports. A combination of export growth and increasing inbound volumes led Savannah to 27% growth in TEUs in 2007.
- Given the high costs, and the swing towards inventory versus transportation expense, air freight traffic grew just 1.1 percent in 2007, the worst performance for the mode since 2003.
- Perhaps most amazing, transportation costs of a percent of GDP are back where they were 20 years ago, when deregulation of the trucking industry was ushering in years of transportation cost declines. Wow.
“May you live in interesting times,” says the ancient Chinese proverb – and curse.
What’s your reaction to the 2008 State of Logistics report? Are you shocked we are back with transportation costs as a percent of GDP that we were 20 years ago? Do you think the current asset shedding and bankruptcies will soon lead to a new capacity crisis? Let us know your thoughts at the Feedback button below.
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