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State of Logistics Report
December 16, 2017
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State of Logistics Report

Stuck in neutral

Comment
The ratio of U.S. logistics costs as a percentage of GDP hasn't changed in two years. Costs should continue to hold steady as the economy struggles to gain momentum.

If you had to sum up the state of U.S. business logistics costs in just a few words, you might do well to borrow a phrase that was well-known to drivers of an earlier era: stuck in neutral. That's because logistics costs as a percentage of the overall U.S. economy in 2012 came in at 8.5 percent, exactly the same as in the previous year.

U.S. business logistics costs did rise in 2012, to $1.33 trillion, an increase of US $43 billion from 2011. But that increase—less than half of the increase seen in 2011—paralleled the overall growth in the sluggish economy. In other words, the freight logistics sector was growing at the same rate as the U.S. gross domestic product (GDP).

Article Figures
[Figure 1] U.S. logistics costs as a percentage of GDP
[Figure 1] U.S. logistics costs as a percentage of GDP Enlarge this image
[Figure 2] Calculation of 2012 logistics costs (in U.S. $ billions)
[Figure 2] Calculation of 2012 logistics costs (in U.S. $ billions) Enlarge this image
[Figure 3] Total U.S. business inventories
[Figure 3] Total U.S. business inventories Enlarge this image
[Figure 4] U.S. inventory-to-sales ratio
[Figure 4] U.S. inventory-to-sales ratio Enlarge this image

That and other findings indicative of slow growth for at least the next few years prompted transportation consultant Rosalyn Wilson to choose Is This the New Normal? as the title for the Council of Supply Chain Management Professionals' 24th Annual "State of Logistics Report," sponsored by Penske Logistics. 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. (For more about the report, see the sidebar.)

The report measures logistics costs against the U.S. GDP, a ratio often cited as a measurement of the supply chain's efficiency in moving the United States' output of goods. A ratio below 10 percent traditionally was viewed as a sign that the nation's logistics managers were keeping costs under control and boosting operational efficiency. Since the Great Recession of 2007-2009, however, a low ratio has signified a decline in shipping expenditures and transportation costs that correlates to sluggish economic activity. In fact, the lowest point ever recorded in the 30-year history of the report was a ratio of 7.8 percent in 2009. (The "State of Logistics 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.

Carrying costs, inventory up slightly
The report breaks down overall logistics expenditures into three major components: inventory carrying costs, transportation costs, and administrative costs.

Inventory carrying costs rose in 2012 to $434 billion—a 4-percent hike from 2011. Carrying costs reflect the amount of interest paid on inventory, the expenses for holding inventory in storage (taxes, obsolescence, depreciation, and insurance), and warehousing costs. (See Figure 2.)

The value of the nation's business inventories (which includes agriculture, mining, construction, services, manufacturing, and wholesale and retail trade) rose to almost $2.3 trillion last year. In her report, Wilson pointed out that U.S. business inventories rose in three out of the four quarters last year. (See Figure 3.) All three subcategories of inventory (retail, wholesale, and manufacturing) climbed in 2012. Retail inventories increased 8.3 percent, far higher than those for wholesale (3.8 percent) and manufacturing (1.3 percent).

Although inventory levels rose, interest rates did not. In fact, the interest component of carrying costs declined by 6.9 percent, according to Wilson. That's because the cost of capital, as measured by the commercial paper rate, declined. The commercial paper rate, which reflects the interest businesses pay to borrow short-term capital, reached near-historic lows, falling from .13 percent in 2011 to .11 percent in 2012. Had it not been for the low cost of capital, Wilson noted, the growth in inventory levels would have caused carrying costs to rise.

Interestingly, the retail inventory-to-sales ratio, which indicates how well retailers are balancing stock with sales, rose in the latter half of 2012. During the Great Recession in 2009, that ratio skyrocketed to 1.49. During the first four months of 2012, it stabilized at 1.26, indicating that sales and inventory were fairly well balanced, Wilson wrote. By year's end, however, flagging sales had caused it to inch up to 1.28. (See Figure 4.)

Taxes, obsolescence, depreciation, and insurance rose 2.6 percent in 2012 to reach $302 billion. Wilson said that hike was directly related to the growth in inventories.

The final component of inventory carrying costs—warehousing expenses—totaled $130 billion in 2012, up 7.6 percent from 2011. In her report, Wilson noted that lease rates for warehouses have risen, indicating a recovery in this sector. Although new construction has increased available inventory, occupancy rates for warehousing have continued to rise.

Transportation costs in check
Transportation, the second major component of U.S. logistics costs, rose only 3 percent in 2012. Transportation costs totaled $836 billion last year, up from $821 billion in 2011. Wilson said that transportation costs increased modestly because of weak and inconsistent shipment volumes and strong pressure to restrain rates. As a result, transportation accounted for 5.4 percent of overall GDP in 2012—well below the historic norm of approximately 6 percent.

Trucking costs, the largest component in the transportation sector, totaled $647 billion in 2012. Intercity motor carriage, at $445 billion, accounted for about two-thirds of that amount, while local motor freight (which includes delivery services) reached $202 billion.

Truck tonnage rose 2.3 percent, and utilization rates "are at all-time highs," Wilson noted in the report. Those are two of several factors suggesting that the trucking industry is on the brink of serious capacity problems. Another is the new Federal Motor Carrier Safety Administration (FCSA) hours-of-service (HOS) rules, which reduce maximum weekly driving time. According to various estimates, that could potentially reduce driver capacity by 2 to 5 percent, and could cause productivity to decline by between 2 and 10 percent, Wilson said. Additional new rules on medical certifications and drug testing could further shrink the pool of eligible drivers. Put that together with difficulties in recruiting and retaining drivers, and it's estimated the industry currently needs 30,000 more drivers, she said.

Spending on rail services, the second largest component of transportation costs, amounted to $72 billion last year. That's up 4.9 percent, a modest increase compared to the 16-percent spike in 2011. Intermodal volume was the second highest on record, providing competition that helped to keep down motor carrier rates. Although intermodal fared well, bulk rail shipping did not: total carloads for the year fell 3.1 percent from 2011.

Costs for shipping by water totaled about $35 billion, with international shipping accounting for about $27.5 billion and domestic waterways $7.5 billion. Because of increased vessel capacity, ocean carriers struggled to maintain rate levels, and many engaged in a bidding war over declining cargo volumes. As a result, overall costs for water transportation declined by 0.9 percent in 2012, despite higher rates for some domestic barge shipments brought about by drought-related restrictions on traffic.

As for other transportation components, oil pipelines generated $13 billion. The airfreight industry accounted for $33 billion, an increase of 3.1 percent over 2011, but the industry continues to struggle with profitability due to "chronic overcapacity and deteriorating yields," Wilson observed. Freight forwarders, a category that also includes third-party logistics service providers, brought in $37 billion, an increase of 5.4 percent.

In addition to 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, totaled $10 billion in 2012, up just 1.8 percent from 2011. 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—amounted to $51 billion in 2012, up $2 billion from the prior year.

Slow growth is the "new normal"
As for the future, Wilson said the recovery from the Great Recession has been longer than most economists anticipated. In the past, consumers spurred economic recoveries, but this time consumers, who lost ground financially during the downturn, have little confidence in the economy. Most Americans are "still holding tight to their paychecks, spending most of that on necessities," she said.

Although manufacturing had been a bright spot following the Great Recession, sustaining some growth, that sector too has cooled. Manufacturing grew at 7.4 percent in 2010, then 5 percent in 2011, and last year dropped to 3 percent. Since manufacturing growth has abated, Wilson noted, there is less demand for logistics services.

Where's the U.S. economy going? In Wilson's view the economy is entering a period that could be termed the "new normal," one that's characterized by slow expansion with GDP growth hovering between 2.5 to 4 percent, high unemployment levels, and slower job creation. Given those economic conditions, she expects that both the economy as a whole and the logistics sector will be slow to regain any sustainable momentum, and that growth rates will be uneven for some time to come.

James A. Cooke is a supply chain software analyst. He was previously the editor of CSCMP's Supply Chain Quarterly and a staff writer for DC Velocity.

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