2009 State of Logistics: Collaboration Time
The 20th Annual State of Logistics Report finds that conditions have worsened beyond last year's forecast. But as dismal as the numbers are, shippers are advised to renegotiate rates and lock in carriers now. Above all, the two parties shouldn’t lose sight of the dependence they have on one another.
By Patrick Burnson, Executive Editor -- Logistics Management, 7/1/2009
The 19th Annual State of Logistics Report (SoL) published last July seems like ancient history now, with its cautiously optimistic news that lower energy costs coupled with a tepid rise in consumer confidence might work to restore the diminishing fortunes of carriers and providers.
According to the 20th Annual SoL, business logistics costs fell to 9.4 percent of U.S. Gross Domestic Product (GDP) in 2008 after rising over 50 percent during the previous five years. This number is down from 10.1 percent of GDP in 2007.
For consumers, the new numbers indicate that the final, delivered cost of goods in the U.S. may have declined slightly. In fact, total U.S. logistics costs dropped to $1.3 trillion last year, a decrease of $49 billion from 2007—but still the second highest number on record. Furthermore, interest rates plummeted in 2008 and were more than 50 percent lower than they were in 2007, giving freight forwarders and other intermediaries easier access to financing. In a perfect world, that means less risk for shippers.
But we have not hit bottom yet, says Rosalyn Wilson, an independent consultant and author of the 20th Annual SoL, which is sponsored by the Council of Supply Chain Management Professionals (CSCMP). Over the course of 2008, Wilson reports that total logistics costs continued to drop, with fewer asset-based carriers and third-party logistics providers (3PLs) willing to invest in long-term strategies for growth. And they did so at their own peril, she asserts.
A Necessary Symbiosis
In 2008, inventory carrying costs plunged 13 percent and were the driving force behind the year’s drop in logistics costs, says Wilson. The decrease in carrying costs was due to both a 2.2 percent decline in inventories and an 11.2 percent decrease in the inventory carrying rate. Warehousing costs, however, rose 9.5 percent with warehouse managers reporting that inventory turns were down substantially from earlier years as stock spent more time in warehouses.
Trucking, which comprises 78 percent of the transportation spend component, increased 1.3 percent compared to roughly 4.4 percent for rail, air, and ocean modes. Truckload capacity dropped at unprecedented rates, with freight volumes declining faster than capacity, offering little incentive to keep fleets active. And even though transportation costs were only up 2 percent over 2007 levels, this was not enough to offset the steep decline in inventory carrying costs.
According to Wilson, the second half of 2009 is no time for shippers to squeeze more margin out of beleaguered carriers. Rather, some sacrifice should be considered to mitigate their losses and help them return to profitability. “Collaboration has never been more important,” she says. “I tell everyone to 'mind their relationships,’ and work toward a common goal. This can’t be done if shippers are abandoning their offshore operations or running businesses on an even leaner basis. It’s not sustainable, and can only mean a slower recovery.”
In the meantime, says Wilson, “make nice to the carriers.” She advises shippers to be good to them now when they are truly hurting so that they’ll be able to provide the capacity shippers will need down the road. Her report notes that right now the attrition rate is mounting, as carriers consolidate or abandon some routes entirely. Booking freight from Memphis to St. Louis or Baton Rouge, she says, may become much more difficult.
“While the numbers look pretty bad for carriers and 3PLs, I’m telling everyone to consider what we said when I was a girl scout leader,” says Wilson. “Every great challenge offers the opportunity to excel.” Which means taking a more active role in nurturing supply chain relationships, she says.
Hard Times On the Highways
According to Wilson, it’s a good time to be asset free, as she points to non-vessel operators (NVOs) and 3PL companies as being among the most stable. Some, she says, are even profitable.
“This is a nice 3PL world,” she says, “and pretty much conforms to what we predicted last year. A lot of trucking companies continued to fail or just got out of the business. That doesn’t mean that some will not come back when the economy improves, but for the time being, the barriers to entry are significant.”
The driver shortage—a crisis a few years ago—may resurface again because of regulatory compliance, and Wilson believes fuel prices will begin steadily climbing for the rest of the year (See “Mid-year rate outlook,” Page 34). And until that scenario is altered by more demand, spot rates will continue to be “outrageously” low.
“Right now, motor carriers are just getting 50 percent of what they should be charging,” she says. “But their attitude is one in which some cash is better than no cash. In other words, they are just chasing the money.” That means that shippers may one day begin chasing the capacity, she adds.
As readers of Logistics Management know, this trend has not surfaced suddenly. Over the past three to five years, says Wilson, shippers have seen the blurring of lines between regional and local trucking companies, and a shorter length of haul in general. All transport sectors have been contracting as manufacturers opt for more regional distribution centers.
“There’s been a major long-term change in sourcing decisions,” says Wilson, with logistics professionals considering a much wider range of variables. “As a consequence, many of the existing players are as lean as they can get without going bust. Every mode has to begin looking for some form of investment in the future, especially trucking.”
Dark Skies and Rough Seas
Wilson agrees with industry experts who insist that air cargo rates may have hit bottom.
The International Air Transport Association (IATA) revised its airline financial forecast for 2009 to a global loss of $9 billion this past June, noting that it is nearly twice as high as the association’s March estimate of a $4.7 billion loss. IATA also revised its loss estimate for 2008 to $10.4 billion from the previous estimate of $8.5 billion.
“There is no modern precedent for today’s economic meltdown,” says Giovanni Bisignani, IATA’s director general and CEO. In his “State of the Industry” address to 500 of the industry’s top leaders gathered in Kuala Lumpur during the 65th IATA Annual General Meeting and World Air Transport Summit, Bisignani painted a bleak picture.
IATA’s revised forecast sees revenues declining an unprecedented 15 percent ($80 billion) from $528 billion in 2008 to $448 billion in 2009.
Air cargo demand is expected to decline by 17 percent by the end of the year. In 2009, airlines are forecast to carry 33.3 million tons of freight, compared to 40.1 million tons in 2008. Passenger demand is expected to contract by 8 percent to 2.06 billion travelers compared to 2.24 billion in 2008. The revenue impact of falling demand will be further exaggerated by large falls in yields—11 percent for cargo.
On the ocean-borne side, Wilson says that new vessel deployment schedules are beginning to take shape, routing cargo on an “all-water” course from Asia through the Suez before calling on U.S. East Coast ports. Other analysts have noted that the falling value of the dollar also contributed to this pattern, as traders realized the obvious benefit of off-loading some goods in the EU before reaching U.S. destinations at New York, Charleston, and Savannah.
The Panama Canal, too, has experienced a resurgence of traffic, bringing more cargo to Houston and other U.S. Gulf ports. The Canal’s expansion project will build a new lane of traffic along the Panama Canal through the construction of a new set of locks, which will double capacity and allow for increased traffic and wider ships. With expansion plans on schedule for 2014, this alternative will prove to be even more attractive to operators of the newest “mega” vessels—ships that have not been able to transit the historic passage in the past.
Furthermore, the International Longshore Union, (ILA) comprising most of East Coast dockside labor, has been working with terminal operators and port authorities to manage a more sustainable relationship built upon mutual benefit. Organized and non-union workers alike have a substantial stake in keeping these gateways viable, and unlike their counterparts across the continent, they know it.
Signs of Recovery
Like many financial analysts, Wilson is predicting a slow and painful economic rebound in 2010. A gentle uplift in the housing market along with a return of some consumer confidence will be evident in the U.S. in the early part of next year, with the rest of the world catching up 6 months to 12 months later.
Until that happens, however, Wilson strongly recommends a return to “proactive rather than reactive” behavior. She advises shippers to increase their use of intermodal and to restructure their distribution networks to maximize efficiency and minimize miles.
She shares the sentiments of many other industry analysts who have been championing investment in IT and “real-time” data flows to increase visibility and enhance productivity. And yes, there’s more pressure to “go green” at the same time.
“While shippers invest in new distribution technologies, they should also spend money now on greening their supply chains,” she says. “This will save them a lot of added expense in the future, and is the right thing to do anyway.”
And while they are at it, says Wilson, shippers should review sourcing strategies and the impact of a “reverse globalization” model, checking total landed cost. Meanwhile, she advises shippers to develop contingency plans for their suppliers and their supplier’s suppliers.
“In other words, do whatever you can to help your supply chain partners,” she adds. “Shippers can take this time to review contracts, renegotiate rates, and lock in carriers now, but they shouldn’t lose sight of the dependence we have on one another. Don’t burn your bridges.”
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