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Weak and getting weaker?
Despite a sputtering economy, U.S. business logistics costs managed to rise in 2010. And it wasn't just a slight rise, either. Logistics costs last year amounted to US $1.2 trillion—an increase of $114 billion, or a 10.4-percent hike over 2009's total.
Those were among the findings detailed in the 22nd Annual "State of Logistics Report," titled Navigating Through the Recovery. Because it's the longest-running study in the field, the report provides an accepted measure for quantifying the size of the U.S. transportation market and the impact of logistics on the U.S. economy. Rosalyn Wilson, a senior business analyst at Delcan Corporation in Vienna, Virginia, USA, produces the report under the auspices of the Council of Supply Chain Management Professionals (CSCMP) and with support from Penske Logistics. (For more about the report, see the sidebar.)
[Figure 1] U.S. logistics costs as a percentage of GDP Enlarge this image
[Figure 2] Calculation of 2010 logistics costs Enlarge this image
[Figure 3] Total U.S. business inventories Enlarge this image
[Figure 4] U.S. inventories-to-sales ratio Enlarge this image
Thanks to that $144 billion increase, the report's benchmark industry ratio—U.S. logistics costs as a percentage of nominal gross domestic product (GDP)—reached 8.3 percent in 2010. That represented a notable increase from the previous year's figure of 7.8 percent, which was the lowest point ever recorded in the 30 years that logistics cost data have been collected. (The report was first issued in 1989, but the first edition included data dating back to 1981.) Figure 1 shows logistics costs as a percentage of GDP for the most recent 10-year period.
Historically, a ratio of logistics costs to GDP below 10 percent signified that U.S. logistics managers were doing an effective job of controlling costs and efficiently moving and storing goods. The all-time low in 2009, however, largely stemmed from the decline in goods production rather than from any improvement in efficiency. In other words, logistics costs dropped to such a low level not because supply chain managers were doing a better job than before but because there simply was much less freight to handle.
The subsequent rise in 2010 logistics costs resulted primarily from increases in transportation and inventory carrying costs, two key elements of the total business logistics cost calculation (see Figure 2). Both of those categories rose by more than 10 percent above 2009's levels.
Although it might be tempting to believe that 2010's higher costs are cause for optimism, that's really not the case, according to Wilson. Instead, she says, current conditions make the economic outlook for 2011 questionable. "The underlying pieces are not falling into place to support anything more than weak growth," she wrote in the report.
Inventory costs on the rise
The report breaks down overall logistics expenditures into three major components: inventory carrying costs, transportation costs, and administrative costs. One of the biggest jumps was in inventory carrying costs, which reached $396 billion in 2010—a 10.3-percent increase from 2009. The main reason for that overall increase was the higher cost of taxes, obsolescence, depreciation, and insurance. These amounted to $280 billion, a hike of 15.4 percent from the previous year. Higher inventory levels also contributed to this increase, according to Wilson.
Business inventories (which includes agriculture, mining, construction, services, manufacturing, and wholesale and retail trade) swelled in all but the second quarter of 2010. Quarter 2 experienced a slight dip because mounting inventories caused some retailers to postpone replenishment orders. By the end of the year, however, inventories were at the highest point since the third quarter of 2008. The average investment in all business inventories increased to almost $2.1 trillion in 2010, a jump of $199 billion (see Figure 3).
Even though inventory holdings were up, the inventory-to-sales ratio of 1.25 for 2010 was down slightly from 2009, as companies tried to more closely match stock levels to sales (see Figure 4). They were not always successful, however. Despite optimistic sales outlooks for the holiday shopping season in 2010, stocks did not move, and in the last half of the year inventories accumulated.
It is interesting to note that in late 2007, at the start of the downturn, the inventory-to-sales ratio was 1.26. It skyrocketed to 1.48 in early 2009, but by the end of the year had fallen back to 1.27.
Meanwhile, the commercial paper rate, which reflects the interest businesses pay to borrow short-term capital, reached near-historic lows. The paper rate for 2010 fell to a mere .20 percent, down from .26 percent in 2009. When the value of inventory was multiplied by the paper rate, it resulted in just $4 billion of interest. That's $1 billion less than the previous year.
The final component of inventory carrying costs—warehousing expenses—totaled $112 billion in 2010, down 6 percent from the $119 billion reported for 2009. That decline occurred because excess capacity in the commercial warehousing market resulted in "aggressive pricing" for tenants even when inventory levels rose, Wilson noted. A doubling in the average size of distribution centers in the past 10 years and the trend toward optimizing transportation and distribution patterns have reduced demand for facilities, adding to the excess capacity, she said.
Transportation costs jump
Transportation, the second major component of U.S. logistics costs, witnessed a 10.5-percent spike in 2010. Transportation costs totaled $768 billion in 2010, up from $695 billion in 2009. Higher freight volumes, fuel surcharges, and in some cases, rate hikes pushed transportation costs up across all modes. As a result, transportation accounted for 5.2 percent of overall GDP in 2010, but that's still below the historic norm of 6 percent.
Yet the increase in transportation costs did not necessarily translate into a strong year for transportation companies. For example, trucking, which accounts for the majority of shipments in the United States, did not fare well even though revenues increased somewhat. Intercity motor carriage hit $403 billion in 2010, compared to $368 billion the previous year, and local motor freight reached $189 billion, up from $174 billion. Overall spending on trucking services in 2010 amounted to $592 billion, a $50 billion increase from the prior year.
In spite of these increases, the trucking industry struggled to cover its operating costs. For example, much of the increase in motor carriers' revenues was attributable to fuel surcharges, but those additional dollars did not cover the carriers' added fuel expenses, Wilson said. Additionally, shipment volumes remained volatile, and the market in 2010 still contained some excess capacity despite a spate of carrier bankruptcies. Indeed, truck capacity has dropped by 16 percent since 2006 as motor carriers have exited the marketplace. Yet despite the loss of capacity, rates stayed "stubbornly" flat for most motor carriers, according to the report.
As for the other modes, taken together airlines, railroads, freight forwarders, water, and pipeline movements accounted for some $168 billion in spending in 2010, a 10-percent hike over 2009's $146 billion.
Railroads did particularly well. In fact, rail freight revenue leaped 21.8 percent, rising from $50 billion in 2009 to $60 billion in 2010. The 7.3-percent increase in car loadings and the 14.2-percent uptick in intermodal shipments recorded last year represented the largest annual percentage increases since 1988, the earliest year for which comparable data exist. Along with the higher volumes, the railroads also succeeded in raising rates, bumping up revenue per tonmile from 2.84 cents to 3.33 cents.
Shippers spent $33 billion on domestic and international water transportation in 2010 compared to $29 billion in 2009. Despite overcapacity, ocean carriers were able to extract price increases from shippers. That changed a little more than halfway through the year when some carriers began offering low spot rates in the trans-Pacific trade. As the industry continues to introduce new and larger container ships, overcapacity will remain an issue. Rates and tonnage for inland waterways shipments were fairly flat while a rebound in steel production boosted Great Lakes shipping by 23.3 percent over 2009.
Oil pipelines generated $10 billion, the same amount as in 2009. The airfreight industry took in $33 billion in 2010 compared to $29 billion in 2009. The first half of 2010 was "great" for the air cargo industry, Wilson said, because companies were waiting to see how business fared before placing orders, and they were willing to pay for the upgraded service to move last-minute shipments to replenish shrunken inventories. That boom didn't last long, though, and by midyear even specialized technology items were being moved on ships again.
Non-asset-based providers tend to be better off during a slowdown, Wilson said. Freight forwarders fared well until about halfway through 2010, when they struggled along with the rest of the industry, she noted. For the year, however, that segment garnered $32 billion versus $28 billion in 2009, a 15.4-percent increase.
Aside from inventory carrying and transportation costs, two other factors figure in Wilson's computation of business logistics costs. Shipper-related costs, which include the loading and unloading of transportation equipment as well as traffic department operations, were up 2 percent from the previous year. Administrative expenses—which are computed by a generally accepted formula that takes the sum of inventory and transportation costs and multiplies it by 4 percent—increased by 10.4 percent.
Although the report's overall results seemed to indicate some signs of improvement in 2010, preliminary data from this year suggest that the direction of the economy remains unclear. Indeed, at the time the "State of Logistics Report" was released in June, preliminary economic figures for 2011 gave some reason for concern that the economy was not fully recovering. U.S. unemployment was rising again, and new factory orders had dropped. "The recovery is very atypical of previous recoveries in the United States," Wilson said. "The economy has not quickly returned to previous growth levels."
With the economy sputtering, freight shipments have flattened since March 2011 and actually declined in May 2011. Although some experts are still calling for the economy to strengthen during the remainder of the year, Wilson's view is that that the business conditions appear to be stalling. "Key indicators show that the economy is beginning to unravel in some sectors," she wrote in the report. "It has been close to two years since the recession was pronounced over, and for many Americans, things have not improved."
Given that troubling outlook, Wilson said, shippers and carriers are sure to face challenges for the remainder of 2011. She is convinced that shippers and carriers need to build stronger relationships so that they can ride out the current turbulence together. Still, despite the uncertainty over the future, she believes that innovative companies will be able to successfully navigate the difficult business conditions ahead.
For more than two decades, the annual "State of Logistics Report" has quantified the size of the U.S. transportation market and the impact of logistics on the U.S. economy. The late logistics consultant Robert V. Delaney began the study in 1989 as a way to measure logistics efficiency following the deregulation of transportation in the United States. Currently the report is authored by Rosalyn Wilson, a senior business analyst at Delcan Corporation in Vienna, Virginia, USA, under the auspices of the Council of Supply Chain Management Professionals. This year's report was sponsored by Penske Logistics.
CSCMP members can download the complete 22nd Annual "State of Logistics Report" at no charge from CSCMP's website at http://cscmp.org/memberonly/state.asp.
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