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June 19, 2008 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

State of the Logistics Union 2008

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.

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."

What do you say?

Send us your comments here

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 decades, 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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Dan Gilmore


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

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Supply Chain by the Numbers: June 19, 2008


Despite volatile trading on Wall Street last week, most indices finished the week on a high note.  For the most part, our Supply Chain and Logistics stock index held steady.

In the software group, i2 recovered all of last week’s losses (up 3.9%); however, Descartes slid another 5.1%.  In the hardware group, Intermec continued its growth (up a slight 1.3%), while Zebra fell another 3.8%.  In the transportation and logistics group, Yellow Roadway continued its decline (down 8% for the week).        

See stock report.


Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
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It Always Comes Down to the People in Voice Deployments

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Discussion Question

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The Executive View

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Complexity is Daunting, but Leaders Excel in Costs, Speed, Quality, and Risk Management

Tyndall Offers Three Key Steps to Achieve Global Logistics Excellence


What country had the highest percentage growth in containers exported to the US from 1997 to 2006?

A. Click to find the answer below


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As always, catching up on a variety of letters this week, on several topics. Remember, we now include Feedback below each article – please read and share your perspective.

Our Feedback of the Week is from Steve Richardson from Bristol Packet Wharf, who responds to the series of excellent columns our blogger Kate Vitasek is writing on performance management, starting with a data quality series. We chose to publish another letter on our piece on what went wrong with Wal-Mart and RFID, because the piece from Len DeWeerdt is just very good. Dr. Jim Newcomer agrees that the slowdown in Russian Oil production could be a worrying sign, while other readers from around the globe comment on optimization versus simulation, and easiest supply chain improvement ideas.

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 Data Quality:

I worked in retail and manufacturing for many years and bad product data was always a problem that, even today, people just accept and deal with as part of their day job.

For most of my career I worked in Space and Category management departments where accurate data was critical to optimizing the shelf space, yet daily, errors in the data were identified and more time was spent on trying to correct the information, then spent on actually analyzing the data to make the most of the space.

We never got the data 100% accurate and so used gut feel on many occasions to make decisions on whether to extend or reduce the distribution of a product into the stores or give it more facings on the shelf. At that time, (and it probably still is!) it was more about getting a planogram out to stores by a certain deadline so they could merchandise the shelf. My decisions to put a product into 50 stores as opposed to 500 stores based on the, not wholly accurate, information I had at the time, will have undoubtedly had a massive impact on sales, not only for my employer, but for the Brand owner!

That’s why I get frustrated, even today, when suppliers tell me that only the retailer benefits from good quality data and the retailer tells me its not their problem, this the supplier who should be giving them accurate data……………stalemate!

We talk about collaboration and sharing information to make the supply chain more efficient, but nobody seems to want to tackle the issue of bad data head on. It’s easier for individual departments to do their own thing and let someone else worry about the bigger picture, unless of course, you are on the board, in which case, the subject of product data is just a dull distraction that is best left alone.

It’s about time that individuals in these organisations got together as virtual teams or, as some companies are doing, formed data quality teams and tackled the problem. There are product data quality solutions providers out there that have been around for many years, have a massive amount of experience, that are eager to help and have built and developed data quality services that many companies could see immediate benefit from.

I leave you with this thought……If I had more accurate product dimensions I wonder how many more products would have got stocked in more stores and if that product I mentioned, was listed in 500 stores instead of 50, as the Brand Manager and Buyer, how much more would you have sold? I reckon that alone would probably pay for the data quality service for many years!

Steve Richardson
GXS Product Data Quality (PDQ)
Bristol Packet Wharf

On Wal-Mart and RFID:

As a long time follower of your publication, and a 30 year veteran of the automated material handling industry, I am mostly in agreement with you, but....

It seems there is always a but. I need to start with the fact that I worked on my first RFID project in the late 80's, when the tags were to track heavy materials around the plants. Later, I spent some time in defense initiatives where the applications were high energy active tags and pretty effective too.

After the Wal*Mart mandate, I worked with a number of executives (Kraft and other firms) and asked their views. Since it was a case level RFID initiative when announced, most manufacturing folks said, "it is too expensive" and I agreed. The costs were $.50 plus and the read rates and speed were deplorable. The technology that was needed was still in development, and still is, which was a low-power passive tag. I previewed prototypes at RPI (under $.10) and was impressed by the concept but the facts were not so good. As I make my living consulting on technical and financial feasibility for automation, I'll follow with this set of thoughts.....

Technically, the potential to get to low-cost case level RFID tag is there today, but only as a technology that can be read at the checkout, which was the focus - store level usage in close proximity read environments. As a tool in distribution, the "cheap" tags can not be read under the variety of conditions prevailing in products and environments in DCs and at the rates need to maintain DC velocities. Hence, pallet RFID tracking will no doubt succeed, bringing some benefits, but far from the requested in the initiative.

Financially, a visionary friend of mine, Art St Onge, founde rof the St Onge and Company Consulting company, did an extensive review of the benefits of case level RFID and while I was a doubting Thomas, his presentation numbers and logic were impressive and I theoretically bought on. He showed retailer and supplier seeing returns on investment.

To close, I would challenge you on the improbability oflong term success,as ultimately, it will gain traction as technology keeps plugging along. Short term, I am right with you.

So...., there are my thoughts, for what they are worth.

Keep stirring the pot, PLEASE!

Len DeWeerdt
LW Consulting, LLC

On Peak Oil and Russia:

Yes, I think it [Russian Oil production slowdown) is a significant indicator, not of the end of oil, but of the increasing difficulty of harvesting any greater quantities of oil in coming years.

Prices? I think at some point as prices rise, demand will drop, and prices will then tend to fall off. Lower prices will enable more use that will push prices up again. This cycle will continue, I expect, interrupted by occasional large discoveries such as Alaska’s North Slope and the North Sea that resulted in cheaper gas in the 1980’s, until the remaining petroleum reserves are largely used up. I would sum up my prediction as up and down, and up over the long run.

The effects on our society will be devastating unless public opinion can be alerted to the overall situation, and plans can be made to anticipate social effects, city life, food production, land ownership and transportation, and especially services to vulnerable populations that are already overstressed.

Jim Newcomer, Ph.D.

On Optimization versus Simulation:

I read Supply chain Optimization Versus Simulation.

To add:  In general, solutions derived from Simulation are not optimal. This generalizes the fact that the benefits realized from simulation solutions are lower than the optimal solution. Time required to find an optimal solution from simulation process is dependent on the number of input variables.

Viswanadh Nudurupati

On Easiest Areas for Big Supply Chain Improvement:

This is really a great read. I would like to add more which will save the supply chain cost

1. Change in Mode of transport, i.e., Import of inputs through ocean freight rather than airfreight

2. Zero communication gap among supply chain stakeholders, which will help to make proper planning tosource, procurement of inputs that lead to reduce supply chain cost

3. Buy big fish rather than small fish: Buying decision of a bunch of inputs rather than small but take supply partially as you require which will lead to reduce supply chain cost (by reducing storage cost, purchase savings).

Mohammad Mosharraf Hossain
Bhabna ICT


Q. What country had the highest percentage growth in containers exported to the US from 1997 to 2006?

A. Vietnam, with growth of about 2000% in that period, albeit starting from a very low base.

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