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State of the Logistics Union 2011
Supply Chain Graphic of the Week and Supply Chain by the Numbers
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  Newsletter Archives                Can't View In E-mail? June 16, 2011 - Supply Chain Newsletter

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Wednesday, June 29, 2011

This Week's Supply Chain News Bites
Supply Chain Graphic of the Week: Breakdown of 2010 US Logistics Costs

This Week's Supply Chain by the Numbers for June 16, 2011 - State of Logistics Edition:

  • Trucking Still Dominates
  • Rail Carriers Making Cents
  • Drivers Keep Getting Older
  • Rail Car Blues

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Weekly On-Target Newsletter
June 15, 2010 Edition

WMS vs WCS, What is Enough SCM Redundancy?, Inventory Report and more

Holste's Blog: Avoid the Domino Effect When Making Changes to DC Operations

Top Story: Video: Making Smart Decisions about WMS and WCS Integration
Top Story: Interest in Crossdocking is High, but Challenges are Many
Top Story: Annual WERC DC Metrics Study Finders Leaders Extending their Lead

Q: What is the percent of logistics costs as a percentage of US GDP today versus 1985?
A: Found at the Bottom of the Page

State of the Logistics Union 2011

The annual state of logistics report is just out with much fanfare from Rosalyn Wilson and CSCMP, with the headline news that overall US logistics costs rose 10.4% in 2010 to 8.3% of GDP. That is after two years of logistics cost decline, especially the dramatic, recession-induced slide in 2009 to just 7.9% of GDP. In 2007, logistics costs were calculated at 9.9% of GDP, so we are still well below that recent peak.


" Wilson notes that in 2010, "Freight volumes grew year over year, but unsteadily. There were frequent spikes and valleys in the monthly tonnage, carload, intermodal and container data." "


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This represents the 22nd edition of the report, which was launched in the late 1980s by the late Bob Delaney and sponsored by his company, Cass Information Systems. 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 Delaney's passing, Wilson took on the challenge alone, largely keeping the existing methodology.

Over the past couple of years, the report has received even more hype, with a corporate sponsor (Penske), a panel discussion of supply chain executives and more at the Washington DC report launch event. I was not able to make that press conference, but as always will summarize report here.

As background, US logistics cost rose sharply from 2003 (8.5% of GDP) through the 2007 peak. As the recession somewhat invisibly started in the first half of 2008 and then came on with a vengeance in the last quarter, 2008 logistics costs decline for the first year since 2003, almost astounding given that was the year oil prices reached near $150 per barrel by mid-year. Even then, logistics costs for the full year were estimated at 9.4% of GDP.

The 10-year chart of logistics costs as a percent of GDP is shown below.

View Full Size Image

The calculation of total costs is actually quite complex and includes such things as oil moving through pipelines, but in the end has two major and two minor cost components. One of the majors is inventory carrying costs, which includes such things as interest costs, taxes, insurance and all the costs of warehousing. The other is transportation. There is a very minor line item for "shipper related costs" (never figured that one out) and a somewhat larger one for "logistics administration," which includes IT and other overhead related costs. Neither of these costs has much impact on the totals.

The breakdown of these cost can be seen in our Supply Chain Graphic of the Week nearby, which shows that both major cost components were up over 10% in 2010, with total logistics costs reaching about $1.2 trillion. From an absolute cost level, that puts us back to 2005 levels, but the percentage is lower because GDP was greater in 2010 than it was then, believe it or not.

The increases in inventory and transportation costs reflect both increases in volumes and the actual "per unit" costs themselves. So the actual decline in interest rates during the year, for example, was more than offset by the amount of increase in total inventories. Absolute US business inventories increased by about 10% in 2010 to $2.1 trillion, though with an inventory to sales ratio at the end of the year of just about 1.25, that metric is near the recession low points, after rising a bit earlier in 2010. In 2006, the ratio averaged about 1.33, and in statistical terms the drop to 1.25 is actually pretty significant and shows the intense corporate focus on reducing inventory levels.

The report uses the commercial paper (short term) interest rate for calculating the interest cost expense of those inventories, and those rates fell in 2010 to just .20%, from .26% the previous year (hence why our bank accounts pay virtually no interest).

Wilson says warehousing costs declined 6% in absolute terms in 2010 versus 2009, which I find hard to believe given the rise in volumes year over year, but many companies did significant DC consolidation during the recession, so maybe this is so. Wilson also points out that the excess DC capacity in the US has led to sharp reductions in lease rates.

The cost increases in transportation for 2010 were primarily for increased fuel costs (up about 20%) and some increases in volumes, with higher rates a minor factor, especially from the beleaguered trucking sector.

Wilson notes that in 2010, "Freight volumes grew year over year, but unsteadily. There were frequent spikes and valleys in the monthly tonnage, carload, intermodal and container data."

Trucking costs increased just 9.3% in 2010 on an absolute basis, on a rise in tonnage of 5.7% for the year, and rising fuel surcharge costs supplying most of the rest of the increase. The spend in all other modes combined rose 15.4%. That is due both to mode shifting away from truck to rail and intermodal, as well as stronger pricing power in many of those modes versus trucking. Railcar loadings increased a strong 7.3% and intermodal volumes were up even more at a 14.2% gain in 2010. Combined with strong pricing power, railroad revenues were actually up more than 21% for the year.

A few other highlights from the report:

  • Wilson says carriers currently are only recovering about 70% of the recent increases in fuel costs as surcharge payments from shippers. If this is true, it is much different than the early days when fuel surcharges were a profit center, and a recipe for financial disaster for carriers.
  • Industrial production in the US was up 5.3% in 2010, after a decline of 11.2% in 2009. However, almost all of that increase was from industrial type goods, while growth in consumer products production was flat in the face of weak retail sales numbers.
  • Despite the transportation volume gains in 2010, only about half of the volumes lost during the recession have returned. However, in all modes but ocean carriage (who have received delivery recently of many new megaships ), ruthless capacity reduction has kept the supply-demand balance roughly in equilibrium, with signs that balance is moving in the carriers' favor.
  • More than 3000 trucking firms have gone bankrupt in the last three years, reducing total industry capacity by 13%.
  • Air freight volumes grew sharply in the 1H of 2010, as companies were willing to pay higher rates to keep inventories very low. By the second half, that trend reversed itself, with even many high tech products that had traditionally been shipped via air going by boat. Air freight capacity is down about 12% globally.

We have several more of these factoids in our Supply Chain by the Numbers section.

I will note as I have for the past several years that I wish Ms. Wilson, who does a great job on this, would add a factor in here that somehow notes growth in the pure services sector of the economy versus that of the "product" economy. If the services sectors are growing faster than the product sectors, than the growth of logistics costs winds up being understated. Hope I am being clear on that, though I realize it is complicated because services such as retail are obviously an important part of the product economy.

The report is available at no charge for CSCMP members, of which I am one. Think it can also be purchased there by non-members, though I believe with at best modest effort a copy can otherwise be obtained.

Any reaction to this year's state of logistics report? Anything surprise you? What are your expectations for 2011? Let us know your thoughts at the Feedback button below.


Dan Gilmore


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We received a number of letters on McKinsey's view of the future supply chain, which included some thoughts on building different supply chains for different SKU groups based on a segmentation analysis.

Several of those letters are below, including our Feedback of the Week from James Vinces of Coco-Cola, who says that cost pressures can often get in the way of doing the smart supply chain thing.

You will that letter and others below.

Feedback of the Week - on Inventory Segmentation:


The supply chain segmentation has been a recurrent theory nowdays within different experts' investigations, and indeed it has to be for some strong reason.


From my point of view, I have no doubt that this is the best way to face actual uncertainty environment.  However, I think that the constant low-cost pressure under what the companies are everyday, focus them only on the short-term, driving them to forget the sustainable and profitable long term base needed.  That´s why I think that companies are going to learn this theory, the "hard way", I mean, only when they begin to lose sales.


Hope this point of view is valuable for your magazine.



Jaime Vinces

Technical & Supply Chain Manager

The Coca-Cola Company

More on Inventory Segmentation:

Good article. What should be added is the optimum Supply Chain strategy that should be adopted under each of the four scenarios


Blair Williams

Prof NYU Polytechnic

Wow! What a great idea!

It is about time that the “Big Guys” picked up on it, some of my colleagues were promoting it 10+ years ago.

When I worked for a multi-national 3PL (ModusLink) in 2000, they had actually developed planning and inventory management systems using this methodology.

For a great in-depth explanation and background on “Volume and Variability”, see the article “Solving the Supply Demand Mis-match” by Kate Vitasek, Karl Manrodt and Mark Kelly, in the Sept/Oct 2003 issue of Supply Chain Management Review.

Look for “Managing the Supply Demand Mis-match under the “Articles” page on the SC Visions Website

Dan – I have attached a copy for you personally.

Steve Murray
Principal Consultant and Chief Researcher

Supply Chain Visions


I think this is “spot on”…the question is how do we get ready? There are limited studies of actual examples of such flexible and “double jointed” supply chains. Who can design and implement one…or who can study one that is in existence and see how flexibility may increase market share…or avoid cost by having the ability to “get around” things like the Natural Disaster in Japan? This is really interesting stuff…we should all keep our eyes and ears open.


Patrick Boylr



A company's competitive strategy differs depending on where it is situated. Multi-nationals (MNCs) with operations in Asia typically compete on cost and hence strive towards operational excellence. With the luxury of simply relocating to a cheaper location (as in the case of Motorola in Singapore and Malaysia), it only shows that cost is still a major contributory factor to strategic decisions. Having said that, we are beginning to see SMEs accept a higher cost model in preparation for their changing consumer landscape. SMEs realise that their competitive edge differs from that of larger companies and are capitalising on this fact through the movement on the mechanisation/systemisation matrix.

KOH Niak Wu, Ph.D.

Singapore Institute of Manufacturing Technology


Overall I think it was an excellent piece on supply chain segmentation. I have a few thoughts on the SKU analysis:


I think it was a very well laid out analysis, but I wonder how dedicating/locating facilities based on this analysis can ever be “clean”.  For instance, if this SKU intensity analysis were done on a CPG manufacturer such as, for lack of a better example, Kraft – then I can’t imagine not finding a situation where this analysis could divide manufacturing of similar SKUs that should logically be produced together. Let’s assume Cheddar Cheese to be a high volume-low volatility SKU, along with Nabob coffee (high volume-low volatility) SKU, and then we can have Cheese crackers (high volume high volatility) and some other Nabob coffee SKU (high volume high volatility).


The article, albeit probably simple to illustrate the point, talks about having a facility dedicated to managing each type of volume/volatility combination, and in this case, would there be one facility producing Cheddar Cheese and Nabob Coffee, and the other producing the other brand of coffee and Cheese Crackers?  Does it make sense to segment the manufacturing of cheese products if they are really similar based on volatility/volume (shredded cheese, sliced cheese)? I think the manufacturing can be sorted out, as in today’s world, large manufacturers have multiple facilities anyway, but what about logistics? What if the raw inputs of Cheese are being sourced from one big supplier (putting it simply) located in India, and the analysis suggests having the facility for some Cheese SKU in North America?


I’m not an expert, just curious about the topic.



Ali Badruddin
Q: What is the percent of logistics costs as a percentage of US GDP today versus 1985?
A: Logistics costs as a percent of GDP in 2010 were only about 65% of 1985 levels, an improvement driven largely by substantial reductions in overall inventories.
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