Logistics productivity stalls
Deregulation, technology, and innovative management were supposed to keep pushing down logistics costs, but now progress seems to have stopped. If so, what can reignite it?
By Peter Bradley -- Logistics Management, 7/1/1998
Remember the Greek myth in which Sisyphus was condemned forever to push a boulder up a hill, only to watch it roll to the bottom again? To look at the gross numbers compiled by Robert Delaney every year for measuring logistics productivity is to begin to understand just how frustrated Sisyphus must have been. After nearly two decades of deregulation, rapid development of information and communications systems, and development of numerous management practices with names like Just in Time or Efficient Consumer Response, it would appear that efforts to improve logistics productivity have stalled.In his ninth annual State of Logistics Report, Delaney reports that business logistics costs last year represented 10.7 percent of the nation's gross domestic product (GDP). Four years earlier, those costs represented 10.2 percent of GDP. (See Figure 1.) And that increase of 0.5 percent of GDP represents a $40 billion loss of productivity, according to Delaney, who is a vice president for Cass Information Systems.
With all the attention to inventory and supply-chain efficiency over the last several years, what explains the decline in productivity? Several factors come into play here. For one thing, the burgeoning number of stock-keeping units, driven in part by the proliferation of packaging requirements by major retailers, creates more inventory. The strong economy also tends to keep inventory at record levels--$1.3 trillion in 1997, according to Delaney's figures. And high inventory means high logistics costs. Inventory-carrying costs for 1997, by Delaney's methodology, equaled $325 billion, or 4.0 percent of GDP. That's a slightly higher percentage than the 1996 number, and 0.3 percent higher than the figure for 1993, a year that has become a benchmark of sorts for logistics productivity measurement.
The strong economy also has led to higher transportation costs. Capacity constraints and strong demand pushed up rates in some modes. According to preliminary estimates prepared by consultant Rosalyn A. Wilson for the State of Logistics Report, intercity trucking costs rose by 10.0 percent and local trucking costs by 8.0 percent last year. Other surface transportation rates remained relatively flat, but domestic airfreight revenues grew by 8.0 percent and international airfreight revenues by 14.0 percent. Thus, transportation costs reached 6.2 percent of GDP in 1997, up one-tenth of a point from 1996 figures and two-tenths from 1993's. (For a breakdown of business logistics costs for 1997, see the table on Page 13.)
Of course, gross numbers do not always tell the whole story. As Joseph C. Andraski, vice president of customer marketing operations at Nabisco, points out in the Warehousing section of this Annual Report, "Industries don't implement practices. Companies do." Many individual corporate efforts to cut inventory and accelerate inventory velocity, reduce cycle times, and otherwise improve productivity have paid off. However, those successes are invisible in the macro-economic numbers in Delaney's study.
Logistics as Inflation Buster
Though many analysts have disputed Delaney's methodology and conclusions in the past, none doubt that lower logistics costs are beneficial to the economy. Now, Delaney has added a new postulate to his arguments that logistics productivity has been crucial to the economy. He says that past gains in logistics productivity can be directly linked to the decline of inflation since 1982. Indeed, when logistics costs as a percentage of GDP are charted against inflation as measured by U.S. Inflation GDP Chain-Type Price Index, the correlation is remarkable. (See Figure 2.) The inflation index is relatively new, introduced a year ago by the Department of Commerce's Bureau of Economic Analysis.
Delaney worries that without further changes in business practices and without additional regulatory reform, it will be difficult to make further progress toward the goal of reducing logistics costs to 10.0 percent of GDP or less. Though he admits that is an arbitrary goal, he insists that it is one worth pursuing. To get there, he says, will require cost reductions of an additional $56.0 billion over the next three years. And he suggests several areas on which logistics managers should concentrate:
* Inventory management. The national ratio for inventory to monthly shipments in 1997 was 1.37, Delaney says, which is substantially better than in the early part of the decade. "But, we can do better," he says. "When we reduce the inventory-sales ratio to 1.3 months of supply, we shall reduce logistics costs by $25 billion." To do that requires, he says, "a day-in, day-out, ongoing, unremitting, persevering kind of work." In addition, he contends that suppliers and their customers can work together to reduce inventory. He cites a joint initiative that includes Wal-Mart and several of its suppliers to develop a single forecast for the supply chain with a goal of reducing inventories by 40.0 percent.
* Package design. Delaney points out that since 1984, highway trailer sizes have changed several times and materials-handling systems have changed significantly, but that few companies consider warehousing and transportation costs when designing packaging.
* ERP links to best-of-breed systems. To make progress on the technology front, Delaney argues, enterprise resource planning (ERP) systems must allow connection to best-of-breed planning systems. Most ERPs, he contends, do not perform well on logistics activities.
* Third-party logistics. Third parties' revenues are growing at the rate of 20 percent per year, Delaney says. The reason: 3PLs can offer customers substantial cost and service improvements.
* Drivers. Shippers and receivers can help carriers reduce driver turnover by adopting driver-friendly policies, such as eliminating driver loading and unloading.
* Maritime reform. Delaney specifically encouraged Congress to finish work on the maritime reform legislation, which at the time of his report had passed the Senate and was awaiting action in the House of Representatives. In addition, he argues that the Jones Act, which reserves domestic ocean shipping to U.S.-flag vessels, should be repealed. That would reduce logistics costs by $4 billion to $10 billion, he estimates.
* Rail consolidation. Despite the service problems that Union Pacific has had since its takeover of Southern Pacific, Delaney argues that further consolidation of the industry will make it more efficient. He suggests that instead of regulating the railroads through the Surface Transportation Board, the nation would be better served by ending the industry's exemption from antitrust laws.
* Bigger trucks. Longer and heavier trucks should be allowed on the highways, despite the protests of railroads and highway safety advocates, Delaney says. He believes that alone could reduce logistics costs by $10 billion without compromising safety or damaging bridges and highways.
What's Ahead?
In the pages that follow, Logistics' editors examine the state of the transportation industry today, with a look at how carriers performed in 1997 and at the challenges they and their customers now face. The report gathers statistics from a variety of sources, bringing together in one place a concise picture of the U.S. transportation industry.
Based on the time-honored idea that what is past is prologue, the report can help identify trends that will affect the ability of logistics and supply-chain managers to meet the demands they face, and those are many. They include globalization of market, supply, production, and competition; acceleration of change in the business environment and technology; rising customer expectations; increasing use of electronic commerce and a resulting shift in distribution practices; lowering trade barriers; and recycling requirements that will make reverse logistics a management imperative. Meeting these demands will require greater supply-chain integration both within individual businesses and among business partners.
All of those challenges for logistics and supply-chain managers could offer astute providers unparalleled opportunity. Throughout the industry reports in the following pages, transportation executives acknowledge that their companies must become integral parts of their customers' supply chains if they do not want to become forever relegated to operating commodity businesses. Future Annual Reports will measure how well they live up to that demand.
The Cost of the Business Logistics System in Relation to Gross Domestic Product
[$Billion Except GDP]
Logistics
Nominal Values of All Inventory- Inventory- Total U.S. as a
GDP Business Carrying Carrying Transp. Admin. Logistics % of
Year ($Trillion) Inventory Rate Costs Costs Costs Cost GDP
1980 2.78 717 31.8% 228 214 18 460 16.5
1985 4.18 865 26.9% 233 274 20 527 12.6
1990 5.75 1071 27.2% 291 351 26 668 11.6
1991 5.92 1060 24.9% 264 355 25 644 10.9
1992 6.24 1072 22.7% 243 375 25 643 10.3
1993 6.56 1106 22.2% 245 396 26 667 10.2
1994 6.95 1163 23.4% 272 420 28 720 10.4
1995 7.27 1249 24.9% 311 445 30 786 10.8
1996 7.64 1280 24.4% 312 467 31 810 10.6
1997 8.08 1325 24.5% 325 504 33 862 10.7
Data Sources: National Income and Products Accounts - Levels; Survey of Current Business, March 1998.
U.S. Statistical Abstract: U.S. Department of Commerce.
The Business Logistics System Accounted for 10.7 Percent of Current GDP in 1997
$Billions
Carrying Costs - $1.325 Trillion All Business Inventory
Interest 73
Taxes, Obsolescence, Depreciation, Insurance 183
Warehousing 69
Subtotal 325
Transportation Costs
Motor Carriers:
Truck - Intercity 256
Truck - Local 144
Subtotal 400
Other Carriers:
Railroads 35
Water (International 18, Domestic 8) 26
Oil Pipelines 9
Air (International 7, Domestic 16) 23
Forwarders 6
Subtotal 99
Shipper-Related Costs 5
Logistics Administration 33
Total Logistics Cost......862
Source: Cass Information Systems
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