We’re again this year reviewing the just released “Annual State of Logistics Report,” the 17th such version. This is the third year the report has been written by Rosalyn Wilson alone since the death of original author Bob Delaney. For several years as well, the report has been sponsored by the Council of Supply Chain Management Professionals (CSCMP). It’s available on CSCMP’s site free of charge, but only for members.
The report is presented each year in June based on the previous calendar year’s data (2005), and generally includes some commentary beyond the data along some specific theme. As always, it’s is a bit academic in nature, but I still think it’s worth summarizing for most supply chain and logistics professionals.
To the surprise of no one, logistics costs did rise dramatically in 2005. Still, this may be good data to show the CEO or CFO unhappy with the transportation budget.
Due to all the pressures on transportation costs and higher inventory carrying costs, logistics cost as a percent of U.S. gross domestic product (GDP) surged to 9.5% from 8.8% in 2004. Total logistics spend 15.2% greater in 2005 than 2004. After years of decline (see graphic), logistics spend as percent of GDP is on the rise, and Wilson says she expects it to get back over 10% again very soon.
One minor quibble I have with the methodology is that it doesn’t seem to account for the rise in the services sector as a percent of GDP over the years, specifically those services which have little logistics activity. I believe the rise in logistics spend as a percent of goods-related businesses is actually therefore increasing at an even greater rate that this data would indicate, since the GDP number used as the denominator includes both goods and the faster-growing non-goods sectors.
The cost pressure hasn’t abated in 2006. As Wilson writes, “Given still soaring fuel costs, continued capacity pressures, record levels of truck driver shortages and turnover, and the expected costs of meeting security requirements, logistics costs have continued to rise into the first several quarters of 2006.”
Other data highlights from the report include:
- Total transportation costs were up 14.1%
- Total inventory carrying costs were up 17%, driven by higher interests rates (a key component of the cost of holding inventory) and higher inventory levels driven by offshoring and longer supply chains. The report also cites a move from large, more centralized distribution centers to smaller ones closer to customers, increasing total network inventory. I’m not as sure that really is the dominant trend, but would be a factor in higher inventories if true.
- Warehouse rental rates increased 5% in 2005 overall, though varied of course by individual market. Vacancy rates dropped nationally.
- The driver turnover rate for large truckers in 2005 was 130%, the highest level yet recorded.
- Spending on rail transportation increased 14.3%.
- Airfreight spend increased a very healthy 17.6%.
The “commentary” along with the data in report focused primarily on two related subjects: the troubles with the U.S. transportation infrastructure, and the need for a more secure and resilient supply chain.
We’re going to tackle both subjects in more detail in future columns, but Wilson commentary is worth noting.
“In the past, the US has set the standards for freight system design and management, but we have lost ground over the last decade or so. We have not made sufficient investment to maintain and improve our aging transportation system and it can no longer meet the needs of the record setting growth in freight flows,” Wilson writes. “It is it is no longer a question of ‘if’ we will reach a crisis point, but ‘when’.”
A key emerging issue is the inability of many U.S. ports to handle the new generation of “deep draft” mega-ships coming on-line. It’s not a problem to be solved quickly. It took the port of Oakland 20 years from idea to just beginning the work on its channel deepening project.
Wilson also notes that a combination of the terror threat – with cargo movement being seen as an especially notable target – and complex but lean global supply chains, means companies must increasingly focus on supply chain security and resiliency.
Wilson argues I think correctly that “The best approach for firms faced with such pervasive and potentially existential risk is to work through a framework that manages security as a core business function and integrates security prerogatives across all the activities of the enterprise.” I am less sure of her belief that these efforts can have direct economic benefit. I still think most companies, generally correctly, view this more like buying insurance, which is always a hard sell, even when it is clearly needed. The “good news,” if you will, is that a variety of high profile supply chain disruptions have caused more and more companies to take this seriously.
The bottom line: logistic costs continue to surge, fundamental forces mean the general trend likely means this will continue to be the case, supply chain risk mitigation and security will continue to rise in importance for the entire corporation, and there’s never been a better time to be in supply chain and logistics!
Does anything in these numbers surprise you? Is this kind of “macro” report useful to you? What other data would you like to see? Let us know your thoughts. |