Rosalyn Wilson had an extremely challenging task this year.

In her sixth year as the sole author of CSCMP’s State of Logistics Report for 2009, summarizing 2008 data, she was surely working with one of the most unusual years in logistics history.

Through most of the year, the economy was wobbly but decent enough – until the financial and Wall Street meltdown that smacked us in September.

It was just in the first half of 2008 that we saw a simply unprecedented and almost unbelievable rise in oil prices, which peaked at something around $144 a barrel in July. Some analysts saw $200 in the not too distant future. Then came the ride back all the way back down and more, leading to an incredible collapse by the end of the year.

If you like change and volatility, 2008 was certainly the year for you.

So I was especially interested to see what the logistics report would say this year, and Rosalyn delivered the details yesterday as always at a presentation at the National Press Club in Washington DC. I didn’t make the event in person, but have spent the last several hours digging through the report and slides. (The report will be available soon, if not already, at the CSCMP web site, though only for members. The reality is that if you want a copy, it’s not all that hard to find some way to get a hold of one.)

The “headline news,” not surprisingly, is that total US logistics spend for the year dropped $49 billion in 2008 to $1.3 trillion, though that was still the second highest absolute number on record. Perhaps more meaningful than the total spend was the drop down to 9.4% of total gross domestic product (GDP), after a multi-year, fuel-driven run to up over 10% in 2007.

“The recession has caused tremendous strains on the global economy, but the logistics industry has taken a particularly hard hit,” Wilson wrote. “Purchasing and ordering decreased, inventory levels rose and volumes shipped plummeted.”

The “cost of logistics” is made up of several components:

• Carrying costs, including the cost of inventory and distribution/warehousing expenses
• Transportation costs
• Shipper-related costs (not sure, but it is a very small percentage of the total)
• Logistics administrative costs, including IT, management and more

Transportation costs comprise by far the largest percent, representing $864 billion of the $1.3 trillion total, or about 64% of the total. In the topsy-turvy world that was 2008, transportation costs actually were, in total, up about 2% on the year, versus an increase of 7% in 2007. Of course, all these numbers needed to be considered within the context of the change in GDP – the key is what is the delta between GDP growth or decline in percentage terms versus logistics spend.

In 2008, despite the disastrous fourth quarter, GDP actually rose 1.13% on the year. So, all told, transportation expense actually rose for the year relative to GDP, though just barely, after a really tough 2007 where it rose much faster than GDP.

However, inventory carrying cost dropped sharply, propelled by the dramatic drop in interest rates.

“Inventory carrying costs fell 13 percent and accounted for most of the 2008 decline in logistics costs,” Wilson said. That was a combination of some drop in absolute inventories levels, but a steep drop of 11.2% in the carrying rate, as interest rates were 50% lower in 2008 than 2007.

So, all told, logistics spend versus GDP fell in 2008 for the first year since at least 2003 (see our Supply Chain Graphic of the Week: Logistics Cost Growth Versus GDP).

The last couple of reports have lacked a “theme” that previous reports had to add some commentary on some aspect of logistics beyond the quantitative work, and I miss that. Some years it was quite good. There is, however, some discussion in the report on the generally depressing numbers relative to the impact of the recession on carriers, freight volumes, etc., but those are well known enough that they are not worth repeating here. There is also a fairly lengthy summary of the economic stimulus plan and its impact on transportation infrastructure.

I will also note, as I have for the past couple of years, that I wish this fine effort would more clearly factor in the impact of the split between the physical and service economies. As in general, the services sector has been growing faster than manufacturing, that actually, in a sense, understates the growth in the cost of logistics relative to the product economy (though I will admit it would be a complex calculation to get it right).

Other highlights from the report include:

• Inventories dropped substantially in the last four months of 2008, but it is hard to separate the actual drop in quantity/units with the drop in commodity prices, because various government reports look at the value of inventory, not the quantity. “Businesses are clearing out inventories at a rate not seen for thirty years,” Wilson says, however.
• Nevertheless, given the drop in demand, the overall inventory-to-sales ratio has been rising. The move from a level of 1.25 in June to 1.46 by December was the swiftest in percentage terms since 1982, though such an increase is typical in recession.
• Somehow, the costs of warehousing rose 9.5% in 2008, many times the increase in GDP growth. Wilson cites the growth in complexity and value-added services, and these are certainly factors, but I am not sure the average distribution center cost rose like this for most companies last year. This warehousing number would be a very tough one to estimate, it seems to me. Some data is available on spending on 3PLs, but beyond that, seems a hard one to get at.
• While the double-digit drop in import container traffic has been endlessly reported on, in 2008, the three largest east coast ports (New York/New Jersey, Savannah, Norfolk) actually each saw volume increases in 2008, while the others in the top 10 (six west coast ports plus Charleston, SC) saw declines. “The west coast ports, and particularly LA/Long Beach, are seeing what may actually be a permanent reduction in traffic levels,” Wilson says.
• Wilson says environmental regulations and costs are really hurting the ports at LA/Long Beach, noting that Moller-Maersk announced a few weeks ago that they would be shifting 6,000 TEU vessels to the Port of Seattle, in part for that reason.
• Non-asset based 3PLs have been faring pretty well in the downturn, especially in the transportation management and freight forwarding area. Why? They have been buying freight moves at ridiculously low prices on the spot market and selling them to shippers at only somewhat ridiculous prices, improving their margins.
• Logistics professionals shouldn’t get too excited about the results from the stimulus package. Only about $45 billion is earmarked for transportation, roughly double a normal year’s spend. But only half of that spending at best is likely to impact freight movement. The stimulus package “is only a drop in the bucket for needed transportation investment,” Wilson says.
• On the bright side, there are a number of positive economic indicators. The Conference Board Consumer Confidence Index rose again in May, posting the fourth consecutive gain and returning the index to its highest level in nine months.

Like perhaps no other year, 2008 was a schizophrenic one in terms logistics cost. Unlike the last several years, no one will be able to take this year’s report or graphs to the CFO as support for why logistic budgets are soaring – though I suspect, for many, they will be able to say their logistics spend actually dropped more than the national averages.

Good or bad, I think we can all feel more confident when we have clear trends. Right now, despite some dots of light at the end of the tunnel, we just have lots of uncertainty, and that is hard to manage. I look forward to a more cheerful 2010 report, even if that says logistics costs started to move back up.

Any reaction to this year’s state of logistics report? Is the data even meaningful given the crazy year that was 2008? What would you like to see in the report that isn’t there now? Let us know your thoughts at the Feedback button below.