CSCMP's Supply Chain Quarterly
December 15, 2017
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Comment

Editor's note: We received the following comments in response to Editor James Cooke's Perspective column ("U.S. logistics costs: Are we measuring the right things?") when it appeared in an electronic newsletter prior to publication in the print edition. We welcome your comments on this or any other article in CSCMP's Supply Chain Quarterly via e-mail to jcooke@supplychainquarterly.com. (Letters may be edited for length and/or clarity.)

Managers can control the amount of inventory
With regard to your comment, "Since logistics managers can't really manage carrying costs, then perhaps it's time to change the calculation for U.S. logistics costs to include only those elements that are under the sway of practitioners": Logistics managers can manage a significant factor in carrying costs—the amount of inventory carried. Don't absolve them from this responsibility because they cannot control interest rates.

Now, if you wanted to create a normalizing factor, that would be good. For example, you could establish a baseline "cost of money" at a given percentage, and then translate current carrying costs to that cost of money. It would be a relatively easy calculation to set up. All you have to do is get agreement on the baseline cost of money. Which is easier said than done, as everyone will have an opinion on what it should be.

Mike Ledyard
Partner
Supply Chain Visions Ltd.
Memphis, Tennessee, USA

Interest rates might rebalance ocean flows
In a weak economy, containerized shipping has embraced the [trade-off of] price/cost versus transit time and predictable shipment availability. As interest rates rise, the cost of inventory may require more stringent carrier/vendor management criteria, with more focus on transit time and schedule integrity than on lowest price.

In the 1980s, U.S. Lines failed with their slow and low-cost 4,000-TEU "Econ" ships. Interest rates in those days were in the double digits, and competition based on faster transit time was favored. Today 16,000-TEU ships are flooding the market with excess capacity based on their lower cost advantage. Perhaps rising interest rates will promote a healthier balance of supply, demand, and time to market. Meantime, according to the "State of Logistics Report," international shipping represents a whopping 2 percent of total U.S. logistics costs, and trucking about 50 percent.

Rick Wen
Vice President, Business Development
OOCL (USA) Inc.
San Ramon, California, USA

What about transportation costs?
I enjoyed reading your recent piece on U.S. logistics costs, but I have to disagree a little with your statement.

You conclude that inventory carrying costs are out of the control of logistics managers and that, therefore, this may not be a good yardstick for logistics performance.

Please consider this:

1. Logistics managers can control inventory holding costs by holding less inventory. When interest rates (part of the total cost equation) rise, logistics managers will decide to hold less inventory.

2. Is it not the same with transportation costs? Fuel prices are also out of the control of logistics managers. Yet they can manage how much to ship by which means of transportation. Thus, they only affect what the fuel price is multiplied with—which is the same with the inventory and the interest rate.

Carl Marcus Wallenburg, Ph.D.
Professor of logistics and service management
WHU-Otto Beisheim School of Management
Vallendar, Germany

Why we should consider "administered prices" in calculations
I am the co-author and research principal of South Africa's annual logistics cost survey, of which the ninth measurement has just been released (www.csir.co.za/sol). I would like to comment on your perspective piece, "U.S. logistics costs: Are we measuring the right things?"

I call the phenomenon you refer to "administered prices" (exogenous risk)—elements industry has no control over, such as the interest rate and the fuel price. We should, as you infer, measure the activity (representing the real productivity measurement) and the price attached to the activity, separately. Both should, however, be measured, since this speaks to the heart of logistics—the trade-off between transport costs and inventory carrying cost.

Over the 30 years of Delaney's measurement (and Wilson's since his passing away), transportation's portion of logistics costs rose steadily and inventory carrying costs declined. We need to understand how much of the possible improvement in inventory carrying costs were as a result of lower inventories (the activity) and how much as a result of a lower paper rate. What we do from time to time is to run scenarios such as, "What would the logistics cost percentage have been if the prime rate stayed the same?" (we use prime and not the paper rate), or "What would it have been if the fuel price stayed the same?"

There is, however, a more significant problem to consider. We configure large-scale logistics systems based on, among other things, trade-offs between carrying costs and transport costs. In the case of South Africa's survey, we correctly predicted, over the decade since the survey's inception, that the core cost driver of administered transport costs (the oil price) will rise faster than administered inventory charges (the prime rate). The longer-term view of the changing global economic structure is, however, not yet considered sufficiently in infrastructure investments in many countries, including South Africa. If, for instance, the paper rate rises by 1 percent and the oil price increases to US $300 a barrel in 10 years (which is not unlikely), where will that leave us? Not having engineered a modal shift, for instance, will leave many economies vulnerable.

Both the activity and its administered costs therefore need to be included in macro-level logistics cost measurement, including scenario development. This will allow the development of industry discussion themes, such as this, that could lead to more sustainable logistics practices but also, importantly, policy formulation on a national level to reduce nations' exposure to exogenous risk.

Jan Havenga, Ph.D.
Director, Stellenbosch University Supply Chain Management Centre
Stellenbosch, South Africa

Logistics managers do control inventory
I disagree with the editorial. Logistics and supply chain managers do have a tremendous amount of influence over the amount of inventory held by their firms or within their supply chains. If interest rates are low, they take advantage of the situation by holding inventory and shipping in larger volumes to reduce their transportation costs and lower overall logistics costs. When interest rates increase, they reduce inventory and ship more frequently, again to lower overall total cost. If they're not concerned with the inventory carrying cost, then they definitely are concerned about the availability of working capital or the amount of current assets appearing on their balance sheets.

In addition, the inventory carrying cost should reflect the risk associated with holding those inventories. The inventory-to-sales ratio for retailers has recently been relatively low as compared to prior to the recession. Retailers recognize the risk [cost] associated with holding those inventories and have pushed the inventory back on the manufacturers, whose inventory-to-sales ratio is higher than pre-recession levels. The risk [cost] associated with holding components and raw materials is lower than for finished goods. If they had no control over these costs, then why does their behavior reflect the risks [costs] associated with holding inventory?

If we extend the argument of interest rates being uncontrollable, then why not eliminate transportation costs? Most shippers and carriers have little to no control over the cost of fuel. However, they do have control over the amount of fuel consumed, similar to the amount of inventory being held. The cost of fuel definitely affects logistics and supply chain behavior despite the lack of control over fuel prices.

The challenge of logistics and supply chain management stems from these uncontrollable variables and how executives must attempt to address them in their decision making.

Terrance L. Pohlen, Ph.D.
Director, Center for Logistics Education and Research
University of North Texas
Denton, Texas, USA

Controlling inventory doesn't always equal controlling costs
Excellent perspective on inventory carrying costs.

The original notion was that if you control the physical inventories, you control the costs. Of course, as you pointed out, that is not necessarily true.

Clifford F. Lynch
C.F. Lynch & Associates
Memphis, Tennessee, USA

Fuel costs, real numbers, and inventory strategy
Your commentary prompts several observations:

  • If the thought is to remove those elements one cannot control, and thus cannot measure, then couldn't one make the argument to take out fuel costs, which looks to be under no one's control?
  • The paper rate attaches a dollar cost to the **italic{real number,} which is the actual inventory levels.
  • Just-in-Time was not on the radar screen when Mr. Delaney started the "State of Logistics Report," and it has cycled through as the "next big thing." However, to those who control and match inventory levels to demand, they were, are, and will be the winners. After all, isn't this supply/demand challenge going to be solved by technology?

Gene Nusekabel
CSCMP Member
Dublin, Ohio, USA

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