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State of the Logistics Union 2009
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
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From RetailWire - How to Forecast When History is No Longer Relevant
Expert Insight - The Executive View - Prepare Supply Chains Now for Merger Activity to Follow
Expert Insight - Guest Column by Mona McFadden, RedPrairie - What if Your Transportation Gears Don't Mesh
This Week on "Distribution Digest"
Your Supply Chain Questions Answered! This Week's Question - How Can We Calculate the Potential Throughput of our Distribution Center?
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Supply Chain Graphic of the Week: Logistics Costs Growth versus GDP
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It was a slow week on Wall Street with little movement in both the broader market as well as within our Supply Chain and Logistics stock index.

In the software group, Ariba was up 2.5% while JDA fell nearly the same amount (down 2.6%).  In the hardware group, Intermec was down 3.8% and Zebra was up a very slight 1%.  In the transportation and logistics group, CSX closed out the week with a gain of 7.6%.  On the flip side, Yellow Roadway lost all and more of the last two week’s gains (down 7.3%) as Chairman and CEO Bill Zollars, posted a video on the company’s website saying that the company has no interest in a federal bailout and that their primary interest is securing help from the federal government in the form of pension reform.

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Global Supply Chain
Trends and Issues
BrainTrust Panel Discussion Question

How to Forecast When History is No Longer Relevant


The Executive View

by Gene Tyndall, Editor, CSCO Insights

Prepare Supply Chains Now for Merger Activity to Follow

Merger Synergies today a lot more than just about Costs


Guest Column

by Mona McFadden, RedPrairie

What if Your Transportation Gears Don't Mesh?

You Need Many Processes to Work Seamlessly to Achieve Transportation Excellence


Holste's Blog: Many Large and Small DCs are Content with their Manual Operation – the Question is Why?

Top Story: Time is Right for Labor Management in Distribution

Gilmore: A.H. Schreiber Story Shows Risks to Vendors from Changing Retail Labeling Requirements

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State of the Logistics Union 2009

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.

Gilmore Says:


"No one will be able to take this year’s report or graphs to the CFO as support for why logistic budgets are soaring."

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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.             


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We received a tremendous amount of feedback on our First Thoughts' piece Measuring Inventory Performance. Part 2 of the series is actually coming very soon.


This week we are just publishing a few of the many letters we received, which includes our Feedback of the Week from Scott Brown of Plexus, who says the inventory performance really needs to be measured in conjunction with total supply chain cost and performance. Several other great letters as well.

Feedback of the Week – On Measuring Inventory Performance:


What you touch on towards the end is key. For my money, the measures must address the return on the inventory levels, and customer service as well.  These two should be the gold standard.  With things like turns placed on a second tie, if you have high turns but can’t ship on time, you have other problems.


To your earliest point  - what is a lavish focus on turns doing to your broader performance measures like ROIC? So, however turns are measured, it is critical to provide a context for that measure. On-time delivery to customer requested dates provides that, along with ROIC. As for how we measure turns, in our supply chain function, we capture inventory levels daily and look at average inventory over any number of days required. 


Corporately, we tend to use end-of-period, which as you observe can create some gamesmanship over getting those snapshots as low as possible.  Supply chain finance is about going after lowest total cost. That is how we have structured our approach to supply chain design and inventory optimization. 


Overall, working to understand the total cost, to deliver as requested, and achieve our target ROIC levels, not just a focus on price, but on all the total cost drivers, including lead-times, and demand and supply variability.  I would also suggest it is not only that supply chain professionals need to get better at finance, but that finance and other professionals need to get much better at understanding supply chains.


Scott Brown CPIM, CSCP, CIRM

Manager Supply Chain Analysis & Design

Plexus Corporation

More On Measuring Inventory Performance:


I first wanted to say that I look forward each week to see what you have to say! I subscribe to many news letters, but yours is the only one I keep and archive!


Inventory metrics are a hard one to standardize. We have an extremely seasonal product (ice cream) with a level of constrained capacity.  We track our inventory to the average 3-month forward forecast. It works for us.


I am not sure if I trust anything coming out of finance. When it comes to supply chain management, I try to keep them as far away as possible. (I have found all they care about is closing the books as soon a possible and making their lives easier at the expense of everyone else.)


On your question about S&OP, I have read many of the recent articles on S&OP and have found so many of the articles written by software consultants are all about the new S&OP and you need something from them to make it work!  Did I mention that I don’t trust consultants either? 


Keep up the great work!


Scott Roy
Blue Bunny

I believe the best measure of inventory performance is to compare average inventory over a period of time (typically monthly) to the inventory consumption over the same period of time. This is the only "true" measure in my mind because it removes all the other variables contained in COGS, so it is a true reflection of how well your inventory is "turning" or being managed.


If COGS or revenue is to be used, it should at least look at forecast instead of historical numbers (COGS or revenue) because we are not bringing in inventory to support last month's sales, rather next month's sales.


Dwayne A Wildhagen C.P.I.M.

Manager Demand Forecasting, Planning & Product Configuration Springs Window Fashion

I quickly scanned your newsletter commentary on inventory performance and applaud you turning your attention to the topic.  In short, it is probably the FIRST topic any supply chain professional/business person should master before making decisions on a supply chain, what business to be in, best way to benchmark your business vs. your competition, etc.   


Another good way to get the brain thinking about the topic is to ask what is the inventory turn/IRR/ROA if you can sell a SKU before you have to stock and where can this be done? Answer is quite obvious … a hint as a quote from Buzz Lightyear… “To infinity and beyond”… also, is the figure 8 laying down.


Not all products can or should be sold before stocking/paying for, but in my experience, have never been in ANY business that cannot do some products as such, which has a direct and immediate impact on overall inventory turns and use of working capital.


Jon Kirkegaard



Q. What company provided the funding to start the State of Logistics report 20 years ago, before CSCMP took over the sponsorship of the research in 2004?
A. Cass Logistics, now called Cass Information Systems. Later, Prologis also added sponsorship. For the first 14 years, the report was developed by Bob Delaney, since deceased, a Cass executive at the time.