19th Annual State of Logistics Report: Under the Weather
The 19th Annual State of Logistics Report finds that conditions have gotten just about as bad as they can get. But industry analysts affirm that savvy logistics managers will benefit from their time managing through the current storm.
By Patrick Burnson, Executive Editor -- Logistics Management, 7/1/2008
When we dissected the 18th Annual State of Logistics Report last July, it appeared that the industry was poised for a rebound. Inventory levels were still problematic and surging energy costs were a concern, as were some so-called “value-added” expenses. But all in all, most logistics managers were looking toward 2008 with some optimism.
After all, they reasoned, how high could fuel prices soar? How many more carriers could possibly fall off the vine? How long would consumer confidence continue to lag? Well, the answers to those vexing questions are in; and perhaps now many shippers are wishing they had never asked.
“It's not all doom, gloom, and disaster…but most of it is,” says Rosalyn Wilson, an independent consultant and author of the Council of Supply Chain Management Professionals' (CSCMP) 19th Annual State of Logistics Report. Over the course of 2007, Wilson reports that total logistics costs rang in at $1.4 trillion, up 7 percent from 2006 costs—and she's forecasting still harder times to come. “Because the economy was stalled, total logistics costs went up to over 10.1 percent of GDP in 2007. The last time it was that high was in 2001, and we were hardly surprised back then,” she says.
Escalating petroleum prices are the main—and obvious—problem, but healthcare insurance hikes and inflation are also being blamed by industry analysts. Wilson says she's been predicting such an “adjustment” for the past two years, however. Taxes, obsolescence, and depreciation were also up by about 8 percent in 2007. The increase, says Wilson, was due primarily to the impact of unsold inventories in the system.
“And the economy just kept rebounding,” she says. “It's remarkably resilient in many regards. Foreign investment helped hedge the erosion of profit, and job loss was kept in check by many companies in 2007.”
A year earlier, when Wilson researched and wrote the report examining 2006, she observed that third party logistics providers (3PLs) were going to emerge as important players in the execution of more economical logistics operations. And based on what she discovered in 2007, she still thinks this prediction was right on the money: “With so many independent truckers closing up shop,” she says, “3PLs are going to play an even more critical role. My research also suggests that this will be a long-term phenomena, not just something that is crisis-driven.”
According to Wilson, total volume of wholesale inventories has outweighed retail inventories for the first time “within memory.” That means shippers must determine just how many of the so-called “value-added” services are really necessary. “A lot of it is hype,” she admits. “And you can't really blame anyone for this. The services like RFID tracking and package bundling have genuine merit. But it's a signal that warehouse managers are scrambling for ways to differentiate themselves.” And because inventories are being held at various points in the supply chain, some of these service enhancements may actually be necessary, says Wilson: “You have a truck making a run to a Dollar store, for example, and the driver learns that he can't unload all his cargo there, and has to be redeployed at the last minute. That's where a fully automated warehouse can make a difference, and be a collaborative partner.”
Managing in an “Amazon” world
“We are in an 'Amazon' world, now” states Wilson, noting that consumers still expect to receive deliveries of goods just-in-time—if not faster. “So order management is needed to remove as much weight as possible. This requires visibility that can address the mounting carrying costs of today's operations.”
Indeed, Wilson maintains that while transportation spending as a whole has only grown by 6 percent, the carrying cost of that model has gone up by 8.9 percent—with 10 percent interest. “But we have not seen the revolution of efficiency to accommodate these changes,” she says. “High inventories are not such a bad thing if we can figure out a way to move them.”
Information technology, she asserts, is the “tipping point,” where investment might mean cost savings in the future. However, more automated warehouse systems cannot be created in a vacuum. It is essential, in her view, that 3PLs be involved in establishing links with the motor carrier providers.
“The trucking industry is in a steady downward crunch,” says Wilson, adding that a type of Darwinian enterprise system is taking hold. “The weaker players are just shutting down altogether,” she observes. “Will they come back when the economy brightens? Not likely.”
Meanwhile, more regional motor carriers are taking on long-haul business, and local motor carriers are moving into the regional territory. “Truckers are scrambling for whatever revenue they can get,” she adds. “The cost of operating a truck has gone up by 6 percent, mostly due to fuel costs…and bankruptcies are at a record high.”
Which may lead to another problem down the road, says Wilson. When the economy does turn around, there may not be enough motor carriers to handle a surge in demand. “The barriers are simply too high for many start-ups,” she says. “The railroads have a much easier time of it because they can just park their cars on sidings until they are needed.”
Wilson also notes that owner-operators are not eager to invest in modern “green” models if they fear new federal regulations will come into effect with change in the White House. Indeed, another layer of cost for these professionals handed down by government could be the nail in the coffin. “What is really sad,” she says, “is that a lot of these drivers 'pre-bought' new engines last year and now they may soon be obsolete. It's just a shame.”
The dramatic increase in the price of diesel, which has coincided with a downturn in the economy and a softening demand for freight transportation, is hurting trucking companies nationwide, says American Trucking Associations' president and CEO, Bill Graves. “The trucking industry is experiencing the highest prolonged fuel prices in history,” he says. “Today, it can cost more than $1,300 to fuel a tractor trailer. Because trucks haul nearly all consumer goods, rising fuel costs have the potential to increase the cost of everything transported by truck, including food, retail, and manufactured goods.”
Intermodal Bind
Railroads, meanwhile, are confronted with similar fuel costs. But the core commodities transported via rail are on an up cycle. And since they didn't have the overcapacity issues facing motor carriers in 2007, they were able to raise rates.
Coal and grain export commodities were strong, representing 43 percent and 7 percent of total rail carloadings respectively. Carloads of chemicals were also robust, with a surge of 3.3 percent on the year. Not surprisingly, given the housing crisis, the construction sector was weak for railroads. So, too, was the motor vehicle sector. Together these commodities represented over 60 percent of the lost carloads in 2007.
And as noted elsewhere in this report, utilization of existing operations is going to be a continuing challenge for rail even when volume ramps up. At the same time intermodal needs all the help it can get, says Wilson
“Intermodal volumes were down 1.1 percent in 2007,” she says, “and international containers were down 2 percent. The last time this happened was during recession in 2001. Furthermore, West Coast trucking companies are reporting a drop off of 10 percent, but exports are keeping things from getting worse. We are moving a lot of stuff around, but operating ratios are down for trucks.”
Part of the problem, says Wilson, is that with capacity at a premium due to more demand for exports, containers are in short supply in the nation's interior, and shippers of refrigerated commodities are feeling the pain first. “We're seeing a crisis in that cargo segment,” she says, “and it threatens the long-term sustainability with some commodities. If customers can't get chickens from the U.S., for example, they may go to another country that can deliver them more reliably.”
Ocean and Air Disruption
Ocean cargo shipping analyst Philip Damas says that Drewry Supply Chain Advisers' most recent findings indicate that shippers were blindsided in 2007 by the sudden shift in carrier deployment from the transpacific to the Asia-Europe trade lanes.
“Because imports have historically driven the calls to the West Coast, exporters have been given little leverage to influence intermodal networks,” Damas says. “As a consequence, there are a number of mismatches between import delivery locations and outbound depots. And as we all know, that means a substantial reduction in the availability of empty boxes.”
For this situation to be reversed, he adds, shippers will have to provide carriers more incentives for repositioning containers. For example, they might begin by bringing freight to ports by truckload for transloading, or hold inventory overseas to shorten delivery lead times. “But it is not a painless situation,” Damas admits. “All of these ideas represent more expensive alternatives.”
Meanwhile, there are a number of trends worth watching, he says. These include falling dry bulk rates and the escalation of container fees. The U.S. dollar, he says, will become stronger against other currencies in the coming year, and by 2010 imports will once again be ramping up.
Wilson is also hopeful that port congestion will not be such an issue in the future, since so many carriers have diversified their scheduled sailings. “There's not such a bottleneck at the West Coast any more,” she says, “and it's giving port authorities there time to reengineer their operations and make them more efficient when the inbound traffic returns.”
At the same time, the International Air Transport Association (IATA) is calling on governments, industry partners, and labor to address the fuel crisis that is pushing airlines into the red. IATA forecasts a loss of $2.3 billion for 2008 based on an average oil price of $106.5 per barrel Brent crude, which is the standard industry measure.
The association sounded a warning that this year's loss could be even higher—potentially $6.1 billion with an oil price at $135 per barrel for the rest of the year. “Over the last 60 years the industry made $11.5 trillion in revenues, but only $32 billion in profits,” says the association's director general and CEO, Giovanni Bisignani.
IATA says that the average margin for the entire industry has been just 0.3 percent, while it's $190 billion in debt. Since 2001, airlines achieved massive change. Fuel efficiency improved 19 percent and non-fuel unit costs dropped 18 percent. But the skyrocketing price of oil has eaten these gains and left the industry in negative numbers again. “Oil prices at $130 a barrel are changing the game for everyone,” says Bisignani. “The situation is grim.”
He also says that airlines are struggling for survival and that massive changes are needed. Governments must stop “crazy” taxation, change the rules of the game and fix the infrastructure. “Labor must understand that jobs disappear if costs don't come down,” he says.
Wilson agrees, saying that this past economic downturn has meant a reduction in overtime wages for many transport workers in all modes. “This is particularly true for longshoremen and air cargo handlers,” she says. “While they still earn very good salaries, they will have to adjust to working fewer overtime hours as warehouse and terminal operations become more mechanized and efficient.”
Break In The Clouds?
In searching for a silver lining in the current state of logistics, Wilson points to the fact that the U.S. Commodity Futures Trading Commission (CFTC) is outlining steps that will increase the transparency of the energy futures market and help to ensure that petroleum prices are once again driven by supply and demand.
The CFTC says it will improve oversight of the energy futures market by expanding the amount and quality of information received from energy traders. Steps include expanding international surveillance information for crude oil trading; increasing the transparency of trading in U.S. energy markets; and continuing the CFTC's ongoing nationwide crude oil investigation.
According to Wilson, another positive move has been for U.S. manufacturers to do less outsourcing overseas, and to concentrate more on hemispheric trade. “Mexico is going to become increasingly important to shippers in the coming years,” she says. “It's not just about making auto parts and apparel any more. Mexico has a booming electronics sector, and will become a major player on the R&D stage soon.”
One might assume, then, that building business relationships with cross-border partners would be key. But Wilson contends “that was so last century.” “Pricing power has shifted from carriers to shippers,” Wilson adds. “It's true that shippers will pay for extra fuel charges, but they are not willing to take a rate hike. And forget about relationships. That tag line is dead. Business is more provisional now, and it's all about cutting cost out of the system.”
Patrick Burnson is Executive Editor of Logistics Management.
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