U.S. logistics system improved only modestly in 2011

For those who use and for those who provide logistics services, perhaps the best way to characterize 2011 would be this: not exactly memorable.

The findings of the 23rd annual "State of Logistics Report" paralleled what turned out to be a static year for the nation's economy. After a year of peaks and valleys, U.S. economic activity ended 2011 relatively flat compared to 2010 levels, with gross domestic product (GDP) growing by an anemic 1.7 percent. The report, produced for the Council of Supply Chain Management Professionals (CSCMP) and sponsored by Penske Logistics, chronicles U.S. logistics output.

U.S. logistics costs in 2011 reached $1.28 trillion, a 6.6-percent increase over 2010 levels and a 17-percent increase over the trough seen in 2009. (Total logistics costs are calculated by adding together business inventory costs, transportation costs, shipper-related costs, and logistics administration costs.)

Logistics costs as a percentage of GDP, a ratio often cited to measure the supply chain's efficiency, rose to 8.5 percent in 2011, up slightly from 8.3 percent in 2010. In 2009, the figure dropped to 7.8 percent.

In the 1990s, a ratio in the single digits was hailed as a breakthrough in logistics productivity. Over the past three years, however, a low ratio has come to underscore a decline in shipping expenditures and revenues as shippers and carriers downshifted in response to the decline in economic activity.

Overall, economist Rosalyn Wilson, the report's author, called 2011 a "rather unremarkable year" for logistics statistics. Still, her 25-page analysis was sprinkled with more optimistic comments than were found in the previous two distinctly downbeat reports.

"Things have not been especially robust in the first half of 2012," she wrote. "However, there are enough signs of improvement that [the] economy really does seem to be on the way up."

Transportation
For 2011, transportation "costs"—or revenues generated by freight carriers—rose 6.2 percent over 2010 levels. But that increase came from higher freight rates and not from increased volumes, the report said. Rates generally increased or held their ground in 2011, allowing trucking companies in particular to recover some of their increased operating expenses. However, higher labor, equipment, and insurance costs still ate up a good chunk of those gains, the report said.

In the transportation industry, the big winners for the year appeared to be railroads and third-party logistics providers. Third-party logistics providers—which account for a large portion of the report's "freight forwarder" category—posted a 10.9-percent year-over-year revenue gain, substantially above pre-recession levels, the report said. Rail revenues, in aggregate, climbed 15.3 percent year-over-year, largely on the back of increased demand for intermodal offerings.

Not every segment of the transportation industry fared as well, however. A decline in ocean freight demand—especially for what turned out to be a nonexistent peak shipping season—led to a relatively small gain in containerized volumes. Traffic rose by between 1 and 5 percent over 2010 levels, depending on the port.

Airfreight revenue, meanwhile, fell 2 percent year-over-year due to weakness in domestic demand and a decline in overall international ton-mile traffic.

Inventory
Overall inventory carrying costs rose 7.6 percent year-over-year. Inventory carrying costs are calculated as the investment in all business inventory plus interest; taxes, obsolescence, depreciation, and insurance; and warehousing costs. The investment in all business inventories in 2011 rose to $2.1 trillion, an 8-percent increase over 2010, according to the report. The increase in inventory levels also resulted in an 8.2-percent jump in insurance, depreciation, taxes, and obsolescence. Warehousing costs rose by 7.6 percent, as greater demand for inventory capacity pushed rents up.

The higher costs and rising demand offset the benefits of declining interest rates for holding inventories, the report said. Interest costs in 2011 dropped 31.4 percent from already historically low levels.

The retail inventory-to-sales ratio (which measures the percentage of inventories a company has on hand to support its current level of sales) stood at 1.27 at the end of 2011. This is a marked reduction from the high levels in 2009, when the ratio spiked to 1.49 as final sales dropped dramatically during the recession.

The current ratio underscores retailers' success in keeping their inventories lean and requiring their suppliers only to deliver the product they need at that point in time. Wilson said the ratio is likely to remain stable as retailers leverage better processes and increasingly sophisticated information technology to more accurately calibrate inventories with consumer demand.