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June 14, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

State of the Logistics Union 2007

Last week saw the release of the annual State of Logistics Report, now sponsored by the Council of Supply Chain Management Professionals (CSCMP), and authored by Rosalyn Wilson, a consultant with a distinguished career in the logistics field.

The “headline news” from the report is that logistics costs overall, and as a percent of US gross domestic product (GDP), continue to rise, up to 9.9% (to $1.31 trillion) in 2006 from 9.4% of GDP in 2005. (Go here for a graphic of inventory, transportation and total logistics costs as a percent of GDP over the last 10 years.)

Putting these costs together is a huge effort, and involves a lot of complexity, both to find all the costs of the country’s “business logistics systems,” as well as to avoid double counting (perhaps an even harder task). That said, I think the report underestimates the practical cost of logistics a bit, in that it does not account for the more rapid increase in the services economy versus manufacturing. For example, financial services account for almost no logistics activity, but are growing rapidly as a percent of GDP, as are services generally. So, for companies in the physical economy, I believe logistics costs are actually growing faster than these numbers would indicate.

But that’s a minor complaint. There is a lot of good insight in the report, as always.

There were a number of factors in the rise in macro logistics costs versus GDP, as well those for individual companies.

Increasing demands for customer service and logistics precision, longer global supply chains, and increased attention to risk mitigation are combining to improve overall supply chain efficiency, but at the cost of rising logistics expenditures. Wilson notes that “Meeting these demands in the global environment has meant rethinking the way we have done business, setting aside time-honored processes, and undoing things that were right 10 years ago. The fundamental changes we have made in the last several years are what are driving the [rising] numbers in our logistics model.”

Wilson also believes service pressures are causing companies to revert from the previous trend towards fewer, larger DCs to a higher number of smaller ones, moving inventory closer to customers. The result: rising inventory and warehousing expense.

“Amazon’s ability to have what we want where we want it, almost NOW, has permeated the expectations of customers at all levels,” Wilson writes.

Transportation expense continues to rise, even as 2006 saw extra capacity in the truckload, LTL, and ocean carrier markets and a favorable freight rate environment. Offshoring continues to drive significant increases in the amount of transportation consumed, fuel surcharge increases add large costs even in a benign base rate environment, and rail carriers have been able to increase rates even as rail and intermodal volume surge.

All that led to strong increases in both overall transportation spend (up 9.4%), even while two huge sectors, such as auto and home building, were down – meaning every one else must be spending a lot more.

There is a lot in the full report, available at no cost to active CSCMP members (Non-members might be able to get one from CSCMP – or even me – with a polite request). Other highlights include:

  • Inventory carrying costs rose significantly (up 13.5%), driven by a signficant increase in total inventories, as well as sharp increases in short term interest rates (which impact the carrying cost calculation because they impact the cost of working capital). Short term interest rates were up more than 50% in 2006 over 2005 (and are still rising in 2007).
  • Despite the continued rise in transportation costs, in Wilson’s model this is the third straight year inventory costs have risen faster than transportation spend, a development countering the 20-year trend towards lower inventory costs.
  • While retail inventories appear lower, as programs such as Wal-Mart’s “Inventory DeLoad” initiative and similar ones by other retailers took hold in 2006, it appears the result was less to reduce total inventories than to simply push them back up the channel. Retail inventories were up only 2.8%, less than total retail sales growth, but wholesale inventories were up a whopping 9.5%.
  • In a US economy that grew less than 3%, rail expenditures were up 12%, driven by a combination of surging volumes (imports) and rate increases, even as rail saw volume reductions in the important housing related areas.
  • Actual tonnage moved by truck carriers actually decreased for the first time in many years, down 1.3%. Revenues were up 8.8%, but mostly due to fuel surcharges.
  • Air freight spend was up a strong 7.6% in 2006, but down from an incredible 17% rise in 2005, as fuel price increases really impacted air freight cost per pound and caused some shippers to find other modes.
  • Port congestion for the time has been reduced by importers shipping to other ports besides LA/Long Beach, stretching out the peak import season, and the continued push of import warehouses and transload facilities further from the ports themselves. The Virginia Inland Port, for example, more than 200 miles from the port in Norfolk, has seen volumes nearly triple from 2003. “Congestion and capacity issues have not really been resolved, we have just been given a breather,” Wilson writes, and I agree.
  • Logistics outsourcing to reduce costs or higher expertise continues a very strong upward trend. Freight forwarders, 3PLs and other outsourcers “are thriving” Wilson says. “The largest 3PLs are still enjoying phenomenal growth in both size and scope, but even stronger is the growth in mid-size 3PLs, who are catering to mid-size companies that are putting more of their logistics dollar into the contract market.”

“One of the most important trends that emerged in the last couple of years is more companies viewing the big picture and trying to understand their entire supply chain, not just their link,” Wilson notes in her summary.

In some cases, this means reducing costs. But, in others, it may mean rising logistics costs for the sake of the total supply chain good.

What’s your take on this year’s state of logistics report? Does anything surprise you, or seem not quite right? Do you agree that companies are starting to move inventories closer to customers, and increasing inventory and warehousing costs? Should the report factor out the changes in services economy growth versus the physical economy? Let us know your thoughts.

Let us know your thoughts.

Want a printable version? Go to:


Dan Gilmore


Supply Chain Videocast Series

Improving Vendor Compliance and Supply Chain Efficiency with On-
Demand Software

EDS's Tom Schaumburg says Improved Data Quality Drives "Frictionless" Commerce

How Retailers, Consumer Goods, High Tech, and other Companies Can Improve their Supply Chains and Reduce Chargebacks by Monitoring Data Flows and Supply Chain Execution

In this informative videocast, you’ll gain insight into the scope and impact of these problems, and how hosted software solutions can monitor real-time B2B transactions to find and fix errors before they impact the supply chain - or your bottom line.

More information, and to register.


This Week’s Supply Chain News Bites – Only from SCDigest

June 12, 2007
Supply Chain Technology: Supply Chain Digest Announces New Product Review Feature

June 12, 2007
Logistics News: Oil Demand Surging at Higher than Expected Pace, Energy Group Says

June 11, 2007
RFID News: Staples Rethinks Item Level Tagging with Active, Recycled Tags


In keeping with the overall market’s retreat last week, our Supply Chain and Logistics stock index also saw general downward movement. 

Software provider JDA was up, hardware makers Zebra and Intermec were down, and rail carriers Norfolk Southern and Burlington Northern were hit hard.

See stock report.


Manufacturing News: Have Distorted Statistics Understated the Negative Impact of Offshoring and US Manufacturing Competitiveness?

New Report Says Yes; Large Implications for the Economy, Wages, and Productivity


by Mike Loughrin
Mike Loughrin

Lean Supply Chains: Crafting a Lean Audit

Employee Empowerment and Flexibility Are Key; Provide Your Input


by Mark Fralick

Supply Chain Software: Review of i2's Business Content Libraries

Pre-designed Processes/Workflows Show the Great Promise of SOA and Can Help Enable Supply Chain Innovation; i2's Challenge will be Continuing the Build Out of the Library


Have a supply chain or logistics related questions you need answered?

Ask our panel of experts. See our growing list of questions and answers - share your insight.

Reader Question: Can we implement WMS and Labor Management at the same time?

New reader response from Dave Erickson... read and add your insight.


Q. What event in 1980 was perhaps the key factor in the reduction of overall logistics costs as a percent of sales and GDP in the US?

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.

We publish this week a few of the letters we received from our First Thoughts column on issues with US Logistics Infrastructure. That includes our feedback of the week from Mark Wilder of Marzetti, who thinks infrastructure issues plus a series of other problems are really going to impact US competitiveness. You'll find a few more letters on this topic, plus a short note from Randy Pettigrew of JB Hunt, who thinks the results from the Oregon sample drug test of truck drivers is a bit scary.

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 Transportation Infrastructure

If the state of the nation's infrastructure does not create a crisis in itself, it may very well do so in conjunction with a lot of other serious challenges that seem to be on the horizon:

  • driver shortages
  • peak oil - energy insecurity
  • global warming - natural disaster
  • deficit spending
  • increased taxation
  • unfunded liabilities of Social Security and Medicaid / Medicare
  • aging population
  • illegal immigration

In my view these things together have serious potential to limit our standard of living in the future.  

Mark Wilder
Distribution Manager

More on Transportation Infrastructure

Whether we have a huge issue with our logistics infrastructure depends what you read and who you think is correct.  Personally, I’m more concerned about the security of our ports given the apparent movement toward RFID seals, etc.

Nonetheless, thanks for a nice piece.

Dr. James Giermanski

I just read your column on supply chain infrastructure in the U.S.  It is a very serious problem and one of our clients, the Intermodal Transportation Institute at the University of Denver, has been in the forefront of discussing this topic in the press, on Capitol Hill and elsewhere. 

Your readers may benefit from being aware of their web site and research, which can be found at this link:

We enjoy your publication. 

Jim Martin
JDM & Associates Marketing LLC

On Truck Driver Drug Testing

This was a very interesting side note.

Sort of makes you a little afraid to get on the road.

Randy S. Pettigrew
J.B. Hunt Transport, Inc


Q.  What event in 1980 was perhaps the key factor in the reduction of overall logistics costs as a percent of sales and GDP in the US?

A. The Motor Carrier Act of 1980, which deregulated trucking.

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