This Week on SCDigest:
State of the Logistics Union 2010 – not Good
Supply Chain Graphic of the Week and Supply Chain by the Numbers
New Cartoon Caption Contest!
SCDigest On-Target e-Magazine
This Week on "Distribution Digest"
Trivia  Feedback

Become a Sponsor
Subscribe
SCDigest Home Page  
  Newsletter Archives June 10, 2010 - Supply Chain Digest Newsletter

Featured Sponsor:  Descartes Systems Group
 




Want to Improve the Efficency of Your Private Fleet Operations?

This White Paper Shows you How




UPCOMING VIDEOCAST

VVideocast Series: Fundamentals Of Inventory Optimization

A Series Of Three Short Broadcasts On The Important Things You Need To Know About Inventory Optimization

Featuring Joe Shamir of ToolsGroup, Martin Woodward of ToolsGroup and Noha Tohamy of AMR Research




Register Now!

NEW! UPCOMING VIDEOCAST

Videocast Series: Making Retail Smarter

Part III: How To Adapt To

Marketplace Opportunities In Hours With Real Time Promotion, Loyalty, Cross-Sell & Up-Sell

Featuring Bruno Trimouille of IBM



Register Now!

NEW! ON-DEMAND VIDEOCAST

The Evolution of the 21st Century Supply Chain: Balancing Inventory, Workforce and Transportation

Part 3 -- Bridging The Gap Between Fleet and Common Carrier: Optimizing the Multi--Modal Mix





ON-DEMAND SUPPLY CHAIN SOFTWARE RESOURCES

Includes SCDigest Letter on On-Demand Software and New Total Cost of Ownership Calculator

 

ON-DEMAND SUPPLY CHAIN SOFTWARE RESOURCES


Optimize Sales, Delivery and

Merchandising Processes

NEWS BITES
This Week's Supply Chain News Bites
  - Only from SCDigest
 

Supply Chain Graphic of the Week: Slow Inventory Response to the Great Recession?

   

Supply Chain by the Numbers for June 10, 2010: State of Logistics Edition - More Numbers from this Year's Report

   
SUPPLY CHAIN
CARTOON CAPTION CONTEST WINNER


Who Won our Most

Recent Contest?

See this Week's Winner!

New Cartoon on Home page Monday

 

 
ON TARGET e-MAGAZINE
Each Week:

RFID/AIDC
Transportation
Procurement/Sourcing
Manufacturing
Global Supply Chain
Trends and Issues

Distribution/Material Handling

Weekly On-Target Newsletter
June 8, 2010 Edition

Includes video Interview with Procter & Gamble's Chief Purchasing Officer Rick Hughes on P&G's Greeen Supplier Scorecard

 

 
THIS WEEK ON DISTRIBUTION DIGEST


HolsteHolste's Blog: Employees Are Your First Line Of Defense For Minimizing DC Maintenance Problems



Top Story: The Material Handling Equipment Manufacturer as System Integrator
Top Story: GNC Uses In-House Developed Pick Carts to Turbocharge Piece Picking


Visit Distribution Digest


SUPPLY CHAIN TRIVIA
   

Q.

What is generally considered the primary reason that logistics costs as a percent of GDP have generally been falling in the US since the 1980s?

   
A.
Click to find the answer below
   
State of the Logistics Union 2010 – not Good

Always anticipated, yesterday saw the release of the annual State of Logistics report at the National Press Club in Washington DC.

 

Each year in June, the report (now sponsored in part by the CSCMP) aggregates a variety of data to provide an overview of the prior year’s logistics activity and spend.

 

The very appropriate report title for this 2010 effort: The Great Freight Recession.

 

Yesterday, we put out a quick video summarizing key elements of the report, and received a number of nice comments on it – that 10-minute video can be found here: State of Logistics Report 2010 Instant Review and Comment.

 

Today, I will provide a bit more of the details and add some commentary.

 

Before I do that, just a bit of history: this is the 21st such report, an effort started in the late 1980s by the late Bob Delaney and sponsored by his company at the time, Cass Logistics (now Cass Information Systems). Somewhere along the way, CSCMP took over the sponsorship, and in the late 1990s Rosalyn Wilson, who has a long career in the logistics industry and is now at consulting firm Delcan, began to support Delaney in his efforts. Upon his passing, Wilson took on the challenge alone, largely keeping the existing methodology.

Gilmore Says:
 

"My prediction: Logistics costs as percent of GDP will be about 8% next year."

What do you say?

 
Send us
your Feedback here
 

This year’s report was for the first time sponsored by Penske Logistics, which filmed the event and has plans to leverage that video in a number of ways, including film of the executive panel that discussed the report at the press meeting.

The report should also be available soon, if not already, at the CSCMP web site, though only free for members. Cost for non-members is $385.00, though the reality is that if you want a copy, it’s not all that hard to find some way to get hold of one.

 

The report tracks total logistics costs/spend in the US, which incorporates three main components: 

  • Inventory Carrying Cost, including warehousing costs
  • Transportation (representing some 62% of total logistics costs, as measured by this report, of which trucking is the vast majority at 78% of total transport costs)
  • Logistics administration (IT costs and such)

It was indeed The Great Freight Recession in 2009, and though most of us are familiar with the story and even many of the details, it was good as always to have it put all in one place. In total, logistics costs in 2009 were equal to about $1.1 trillion – that’s a drop of $244 billion (or 18.2) over 2008. Over 2008-09, total logistics costs dropped about $300 billion.

 

That left logistics costs as a percent of GDP at a mere 7.7% - the lowest share of GPD in the 21 years of the report. And this after logistics costs had indeed risen by some 50% over the five years prior to the start of the recession in 2008. (See graphic below). That 7.7% is against 9.7% of GDP in 2008, and 9.9% in 2007.

See Full Size Image

This is truly an astounding change of direction, and one that is most likely a once in a lifetime type occurrence. Of course, at one level if you are a shipper that may have been good news, as transportation costs plummeted, but since it was the direct reflection of a terrible economy, that happiness was surely muted. The real fortunate ones, it now occurs to me, were the lucky few, such as many private label manufacturers, who both saw strong volumes in the downturn and enjoyed the rock bottom rates.

 

How did we get here?

  • Inventory carrying costs: down 14.1% as a result of lower total inventories (-4%) and lower carrying costs (-10%) due mostly to lower interest rates.
  • Transportation costs: down 20.2%, as spend in nearly every mode was down about 20% or more. It was no surprise a combination of both lower volumes shipped and lower rates and fuel surcharges, as diesel prices plummeted. For example, trucking costs were down more than 20% though tonnage was down a much less 12.5%.

 

Of course, many US carriers were said in 2009 to be taking freight at or below their costs to operate the truck (ditto for many ocean carriers). What occurs to me is that those operating private fleets wouldn’t have seen their costs decline by nearly as much as those using all common carriers, as it is unlikely they started cutting driver and mechanize wages, etc. (even if they likely did lay a number of them off). Something to consider.

 

Some other important data points from the report from my view: 

  • The trucking industry lost some 2000 firms in 2009, amid predictions for another 2000 failing this year. That was 12.5% of total capacity lost in 2009.
  • Heavy truck utilization currently is still at only about 75%, so don’t expect many carriers to be buying more trucks any time soon.
  • The report included an interesting graphic that showed how late the US was this time to pare inventories versus the last major recession in 2001 (see Supply Chain Graphic of the Week nearby). One likely cause: the growth of offshoring since then, with much longer supply chains and often the need to place orders months in advance.
  • Rail carriers idled some 500,000 cars by mid-2009, a level which fell just barely to 450,000 idled cars by the end of the year. That represented some 32% and 28% of their car totals, respectively, an incredibly high percentage versus the normal 2-3% that are idle during normal economic times.  
  • Thousands of locomotives were also parked, leading in total to some $43 billion in assets sitting idle. What is ironic, as I noted in the video, is that the rail industry historically has had among the worst average returns on invested capital of any sector. Not long after that began to turn around prior to the recession, they find they have billions in unproductive assets (though some of this was pushed off to the leasing companies). 
  • About 25% of existing total ocean shipping capacity was idled in 2009 – but since ships ordered in prior years kept coming, that didn’t help rebalance capacity very much. As a result, rates fell precipitously, and the ocean carriers did everything they could to cut costs, including so call “slow steaming” to save bunker fuel. And that impacted service dramatically – the report notes a study by Drewry Shipping Consultants that found only 53% of 1600 voyages in tracked in Q4 2009 arrived on time.
  • In the area of 3PLs/brokerage/freight forwarding, the domestic transportation management segment was off 14.7% in 2009, while the international segment fell 25.2% and dedicated contract carriage declined 15.2%.

The question of course is what lies ahead, and the report ends on a cautiously optimistic note in terms of the overall economy, even if that does translate into higher costs for shippers. Manufacturing has rebounded by any number of measures. Ocean rates have clearly been heading much higher, while Global Port Tracker has forecast that TEUs will be up 25 percent for the first half of the year. Idle rail cars are now down to 23% of the total, indicating rail volumes are rising.

 

My prediction: Logistics costs as percent of GDP will be about 8% next year.

 

Two mild critiques of this always fine effort: I wish the report would more specifically factor in changes in the product versus the services economy. With services in general growing more rapidly than product/manufacturing, and I believe having fallen less in the recession, it may in fact somewhat under represent the relative change in logistics costs for product companies.

 

Second, in many prior years, there was some additional theme beyond the raw numbers (“infrastructure challenges” come to mind) that offered some additional interesting commentary. That was gone this year as I believe it was last year as well, maybe because the theme simply was the Great Freight Recession, or maybe there just isn’t time or bandwidth to include it these days. But it added a lot to the report, in my opinion.

 

That’s our take – would love your Feedback.

 

What’s your perspective on this year’s State of Logistics Report? Any numbers surprise you? Will we ever see a year like 2009 again? Whar are your predictions for logistics costs as percent of GDP in 2010? Let us know your thoughts at the Feedback button below.

 

Send an Email



Web Page/Printable Version of Column

SCDIGEST RSS FEEDS


Do you use an RSS reader? Do you have a MyYahoo! or personalized Google page?

For these and more you can have SCDigest delivered right to your personal pages, all week long.

You can subscribe to our RSS feeds in two ways:

  1. Copy our RSS link into your RSS reader - it's easy! www.scdigest.com/rssfeeds.xml

  2. Click on a button below to quickly add it to your favorite readers.
 
YOUR FEEDBACK

We received a few nice letters on our piece Supply Chain Q1 2010, which summarized what SCDigest editor Dan Gilmore was hearing from supply chain and logistics executives and managers as he talked to them for SCDigest and at various events.

That includes our Feedback of the Week from Patrick Byrne of Australia's Best Result Ltd, who offers some excellent complementary thoughts. You will find his letter and several others below.


Feedback of the Week - On Supply Chain Q1 2010:

 

On reading your article, it becomes clear that business networks must find new ways of creating, supplying, transforming, exchanging, distributing and consuming value. This will require alignment, transparency, trust and collaboration among supply chain network participants to achieve new sources of value and simultaneous waste elimination. Technology must play a major role in delivering this new SCM environment.

 

The great challenge now for enterprises within any industry is; how to align, integrate, coordinate and maintain the context and integrity of dynamic end-to-end business processes and transactions that execute across heterogeneous vertical market networks comprising many different organizations, at many different levels, with many different functions and applications, on many different technology platforms of different scale and vintage, operating in many different languages.

Alignment, integration and coordination of demand / supply network participant business processes and transactions become extremely difficult when this level of complexity exists; especially when the different legacy systems applications of the various participants have been written by different people, at different times for different purposes.

This network complexity is further compounded by current enterprise technology, which mandates that dynamic business network relationships, rules, roles, and data formats be fixed.


All these issues present business limitations for enterprises trying to adapt their legacy systems to the dynamic collaboration needs of their business environment.

Enterprise legacy systems have created too much complexity, too much time and money is spent (up to 70% of an enterprise’s IT budget) keeping the lights on and maintaining the status quo; and not enough resources and budgets remain for collaboration and innovation.

New information technology (IT) is not sufficient if it cannot diminish business complexities such as those outlined above; and of no value if dynamic business rules cannot be applied, interchanged and varied to reflect real world market dynamics.

The current service oriented architecture (SOA) approach is being touted as a solution to these complex problems. However, SOA in its present form introduces a new level of complexity (while retaining many of the existing fixed business rule that constrain an enterprise’s ability to adapt to new market dynamics).

Industry pundits promoting this line do not draw attention to the fact that each and every enterprise application to be involved must be SOA enabled.

The question to be asked is; if the objective is to enable synchronized end-to-end network transparency, process automation and execution, then why is it that we make individual enterprise applications the centerpiece, rather than the end-to-end network process itself.

These issues can be solved by adopting the real world end-to-end common network processes that exist in every industry as the heart of collaboration and automation. Cloud based solutions can then be made simultaneously available on a shared Integrated Resource Platform (IRP®) to all vertical network customers, suppliers and competitors, big and small; on a real time many to many basis.

This not only simplifies the complexity of integrating heterogeneous networks of different systems and applications, but also enables flexible and adaptive solutions to be formed around the most complex value network collaboration, cooperation and competitive issues, that are facing organizations today.

Patrick Byrne

Chairman

Best Results (Aust) Pty Ltd


More on Supply Chain Q1 2010:

 

 

There have been so many conflicting news reports concerning an economic rebound and although things appear to be somewhat better, you’re article is a pretty accurate description of the current environment. Despite the fact that companies have focused so much on cost reduction the last few years, your readers would be shocked to know that there are still significant opportunities to further reduce expenses by focusing on the following areas: IT, wired and wireless telecommunications, utility costs, payroll processing, credit card processing and office supplies. For a specific example, a  NJ-based 3PL recently learned they could provide better service to their customers and save over $100K annually by converting their point-to-point T1 circuits to MPLS.

Many supply chain companies today are struggling to manage IT and Purchasing internally and the simple truth is they can get better results faster and cheaper by outsourcing some responsibility to trusted industry experts.

 

Sandy Vosk
President & CEO

ATS, Inc.


Is there any surprise that the hurdle rates for investments are 30% or so given the lack of credit availability for non investment grade companies. Its basic economics, when capital is scarce, return thresholds increase.

David Gustin
Global Business Intelligence

 


I agree with the thesis that supply chain people are being asked to do more and more.  It does over time have a draining effect on managers and professionals.  But, I do see a positive trend among mid - size companies who are now looking to add back some staff and/or improve the skills of those already on the job.   I do not know if this is a trend yet, but at least some companies are looking to their future.  Upgrading the capabilities of the people in your supply chain will produce returns over the new hurdle rate of 30%.      

Herb Shields
HCS Consulting

 


 
SUPPLY CHAIN TRIVIA
Q.

What is generally considered the primary reason that logistics costs as a percent of GDP have generally been falling in the US since the 1980s?

A.

Trucking deregulation that happened in several phases during the decade.

6