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  June 29 , 2006 - Supply Chain Digest Newsletter - Logistics Edition
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First Thoughts by Dan Gilmore, Editor

State of the Logistics Union 2006

We’re again this year reviewing the just released “Annual State of Logistics Report,” the 17th such version. This is the third year the report has been written by Rosalyn Wilson alone since the death of original author Bob Delaney. For several years as well, the report has been sponsored by the Council of Supply Chain Management Professionals (CSCMP). It’s available on CSCMP’s site free of charge, but only for members.


The report is presented each year in June based on the previous calendar year’s data (2005), and generally includes some commentary beyond the data along some specific theme. As always, it’s is a bit academic in nature, but I still think it’s worth summarizing for most supply chain and logistics professionals.


To the surprise of no one, logistics costs did rise dramatically in 2005. Still, this may be good data to show the CEO or CFO unhappy with the transportation budget.


Due to all the pressures on transportation costs and higher inventory carrying costs, logistics cost as a percent of U.S. gross domestic product (GDP) surged to 9.5% from 8.8% in 2004. Total logistics spend 15.2% greater in 2005 than 2004. After years of decline (see graphic), logistics spend as percent of GDP is on the rise, and Wilson says she expects it to get back over 10% again very soon.


One minor quibble I have with the methodology is that it doesn’t seem to account for the rise in the services sector as a percent of GDP over the years, specifically those services which have little logistics activity. I believe the rise in logistics spend as a percent of goods-related businesses is actually therefore increasing at an even greater rate that this data would indicate, since the GDP number used as the denominator includes both goods and the faster-growing non-goods sectors.


The cost pressure hasn’t abated in 2006. As Wilson writes, “Given still soaring fuel costs, continued capacity pressures, record levels of truck driver shortages and turnover, and the expected costs of meeting security requirements, logistics costs have continued to rise into the first several quarters of 2006.”


Other data highlights from the report include:


  • Total transportation costs were up 14.1%
  • Total inventory carrying costs were up 17%, driven by higher interests rates (a key component of the cost of holding inventory) and higher inventory levels driven by offshoring and longer supply chains. The report also cites a move from large, more centralized distribution centers to smaller ones closer to customers, increasing total network inventory. I’m not as sure that really is the dominant trend, but would be a factor in higher inventories if true.
  • Warehouse rental rates increased 5% in 2005 overall, though varied of course by individual market. Vacancy rates dropped nationally.
  • The driver turnover rate for large truckers in 2005 was 130%, the highest level yet recorded.
  • Spending on rail transportation increased 14.3%.
  • Airfreight spend increased a very healthy 17.6%.

The “commentary” along with the data in report focused primarily on two related subjects: the troubles with the U.S. transportation infrastructure, and the need for a more secure and resilient supply chain.


We’re going to tackle both subjects in more detail in future columns, but Wilson commentary is worth noting.


“In the past, the US has set the standards for freight system design and management, but we have lost ground over the last decade or so. We have not made sufficient investment to maintain and improve our aging transportation system and it can no longer meet the needs of the record setting growth in freight flows,” Wilson writes. “It is it is no longer a question of ‘if’ we will reach a crisis point, but ‘when’.”


A key emerging issue is the inability of many U.S. ports to handle the new generation of “deep draft” mega-ships coming on-line. It’s not a problem to be solved quickly. It took the port of Oakland 20 years from idea to just beginning the work on its channel deepening project.


Wilson also notes that a combination of the terror threat – with cargo movement being seen as an especially notable target – and complex but lean global supply chains, means companies must increasingly focus on supply chain security and resiliency.


Wilson argues I think correctly that “The best approach for firms faced with such pervasive and potentially existential risk is to work through a framework that manages security as a core business function and integrates security prerogatives across all the activities of the enterprise.” I am less sure of her belief that these efforts can have direct economic benefit. I still think most companies, generally correctly, view this more like buying insurance, which is always a hard sell, even when it is clearly needed. The “good news,” if you will, is that a variety of high profile supply chain disruptions have caused more and more companies to take this seriously.


The bottom line: logistic costs continue to surge, fundamental forces mean the general trend likely means this will continue to be the case, supply chain risk mitigation and security will continue to rise in importance for the entire corporation, and there’s never been a better time to be in supply chain and logistics!


Does anything in these numbers surprise you? Is this kind of “macro” report useful to you? What other data would you like to see? Let us know your thoughts.

Let us know your thoughts.

Dan Gilmore


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Aug 3: The RFID-Enabled WMS

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June 29

HP Unwinds Central Supply Chain Function , 2006

In an unusual move, responsibilities are split among the operating divisions, but will have company-wide responsibilities

June 29

Weyerhauser Finds Basic Blocking and Tackling Helps Link Supply and Demand

How much will customers buy? Try asking them

June 22 , 2006

HP Raises the Bar in Procurement Through Use of Technology

Significant volume now going through e-auctions; “Vendor Bid Optimization?”

June 22 , 2006

The Pros and Cons of the On-Demand TMS Model

New approach gaining traction, but is not for all

June 15, 2006

Bear Stears RFID Report Confirms What We Should Have Known All Along – New Technology Adoption Takes Time

RFID will provide value, see widespread adoption, but at the pace of most technologSy innovation

June 15, 2006

Dell Retools to Get its MoJo Back

Customer service, shaving a few more dollars off each PC, part of the mix as profit growth slows


Q. How many gallons of diesel fuel does the U.S. trucking industry use per week?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

The letters are pouring in - Thank you!

We are way behind still. We had a number of outstanding letters on our First Thoughts piece on Supply Chain 2006 - a Case Study, which took a composite of a couple of recent conversations we had with consumer goods companies and their current supply chain scenarios and challenges. That includes our feedback of the wek from friend of SCDigest Fred Berkheimer, V. P. Logistics for Unilever North America, who says we hit the nail right on the head. Good letters also from Dwight Klappich

of Gartner and Paul Kretz of Celestica, the latter of whom says we were right on when we wrote that in this environment, you better be good at global supply chain.

These are three great letters - please take a look!


Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the week - on Supply Chain 2006 Case Study

Your story of the durable consumer goods manufacturer's quandary rings so true for many of us.  Even though the details are different we all struggle with retail consolidation, consumers who channel shift, and large retail private label brands that are becoming ever stronger. 

In the end, the consumer decides and the battle being waged is really for mind share - manufacturers' product brands versus retailer brands.  Should the Web or other alternate channel develop that would obsolete the current retail channel, then the game would change yet again.  However, if we manufacturers take a long term view I can't help but wonder if we didn't create this problem ourselves, or at least allow it to happen.  Had we been more tightly linked to the consumer, understanding their true needs of value, product quality versus cost trade-off and structured our products and processes to meet those needs, would the private label brands have developed the stranglehold they have today? 

Perhaps, too often manufacturers have focused on increasing margins (significantly a Wall Street investor expectation phenomenon - a story for another day) and thereby reducing product costs with small and often unnoticed quality compromises.  Over the years we have sliced the baloney so thin that the consumer doesn't regard the branding.  So, on the one hand, we are victims but on the other we get to sleep in the bed we made!

Keep up the provocative articles.

Fred Berkheimer
V. P. Logistics

Unilever N.A. Supply Chain

More on Supply Chain 2006 case study:

I recently published a piece called the “Pull Push Paradox of Global SCM” that expands upon your point and shows that the hype around Demand Driven SCM is flawed for the reasons you mention. How do I become "Demand Driven" when my order lead time is measured in days and my sourcing lead time is measure in weeks or months?

While in Lean my focus was primarily on minimizing total thru-put time with an emphasis on manufacturing and keeping inventories low the new global model flips this around. While as a consumer I admit the impact of the big-box retailers has had a positive affect and is one of key reasons inflation has remained low, my prediction is there will be a calamity of some sort in the not too distant future that will show that aspects of the globalization model are flawed and the dramatic increase in Supply Chain risk will be unacceptable and potentially devastating to companies that have not gone into this with their eyes open.  

Dwight Klappich


Read  your case study on the CPG company. and you are right on.

The issue I see is that when sourcing in Asia is not all costs are included in the analysis.  For instance many companies do not understand freight costs by part number.  They tend to use a peanut butter approach when allocating freight costs and while they might recognize that costs will go up they don't  really understand by how much for that particular set of parts.  When decisions are being made to shut sites  estimates and high level analysis are completed.   The decision making and analysis is kept very close for confidentiality reasons so the experts cannot be engaged  ie freight analysts.  

 It is very easy to see the cost delta for labor...freight and complexity costs are much more difficult to model.  Things like lost sales due to flexibility loss, inventory write downs due to obsolescence, additional costs for warehousing are all costs that need to be assumption based.  Depending on how aggressive or conservative those assumptions will drive the business case.    That versus the real and easily quantified labor cost delta of several thousands dollars per year for a worker.

Flexibility costs, container capacity issues, increasing labor costs in Asia, political uncertainty, fuel prices, IP issues the list goes on ......"you better get good at global supply  chain" is right.....but also very complex with not a lot of really experienced people to help.

Paul Kretz



Q. How many gallons of diesel fuel does the U.S. trucking industry use per week?


A. About 650 millions gallons per week, according to the State of Logistics Report

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