They say there are always two sides to every story. If the findings of the 15th Annual State of Logistics Report are any indication, that's certainly true about globalization.

One side tells of the astonishing boom in world trade, fueled by Asia's factories pumping low-cost manufactured goods into Western economies. The flip side of that story, says economist and consultant Rosalyn A. Wilson, the report's author, is that trade growth will test the strength of U.S. business logistics by forcing shippers to rethink their inventory levels as they stretch their supply chains around the world.

It was a good news, bad news story on the domestic front, too. Transportation costs rose, but low interest rates kept a lid on inventory expenses—nearly canceling each other out and keeping outlays for logistics low in proportion to the nation's total spending on goods and services.

For the last 15 years, the State of Logistics Report has placed a number on the value of logistics in the U.S. economy. The late Robert V. Delaney began the study as a way to quantify the logistics efficiency that he believed resulted from transportation deregulation. In recent years he worked with Wilson to prepare the report; she became a co-author in 1999 and took over the project when Delaney passed away earlier this year. This year also brought a change in sponsorship as the Council of Logistics Management took on that responsibility for the well-known study, whose statistics are often quoted by government and industry analysts,

The report preserves Delaney's original methodology, utilizing the Alford-Bangs Formula to calculate the total value of logistics as the sum of three components: inventory-carrying costs, transportation costs, and administrative costs. Together, they added up to $936 billion in 2003. (See the chart at right.)

That also represented the third consecutive decline for logistics costs relative to this country's annual gross domestic product (GDP). Prior to full deregulation of truck, rail, and air transportation in the early 1980s, logistics accounted for about 14.5 percent of GDP. During the decade of the '90s, that number hovered around 10 percent of GDP. In 2001, logistics as a percentage of GDP fell below the 10-percent mark for the first time, and in 2003 it dropped to just 8.5 percent of the $11 trillion U.S. economy. That's the lowest percentage in the history of the report. (See the chart on page 31.)

Behind that decline are low interest rates, which have held down carrying costs for the last three years. Carrying costs, which totaled $300 billion last year, are the expenses associated with holding goods in storage. They include interest charges ($17 billion), warehousing costs ($78 billion), and the costs of taxes, obsolescence, depreciation, and labor ($205 billion).

To compute interest charges, Wilson multiplied the value of the nation's business inventory—$1.49 trillion—by the annualized commercial paper rate (1.11 percent) to get a rounded value of $17 billion. The $1.49 trillion value for inventory, Wilson says, represented a record-high number that reversed the significant drop in 2002 and restored inventories to levels last seen in 2000.

Warehousing costs remained flat at an estimated value of $78 billion. Rising insurance costs, on the other hand, pushed up the value for the remaining components of carrying costs from $197 billion in 2002 to $205 billion in 2003.

Another record performance: The inventory-to-sales ratio declined from 1.38 months of supply in 2002 to 1.32 months in 2003. "That was the best inventory management performance in the history of the revised data," Wilson writes.

Carrying costs may have remained stable, but it was a different story when it came to transportation costs. Spending on trucking services alone rose by $20 billion in 2003 compared to the previous year's figure. Intercity trucking accounted for a significant portion of that increase, jumping to $315 billion in 2003 from $300 billion in 2002. Spending on local trucking services, meanwhile, reached $167 billion last year, up $5 billion from 2002's number.

Wilson notes that most trucking companies raised freight rates last year to recoup rising fuel and operating expenses. Increased demand, moreover, allowed the larger carriers to be more selective and accept loads from shippers that were willing to pay higher rates.

As for the other modes, the country's railroads saw a slight increase in revenues from $37 billion in 2002 to $38 billion in 2003. Their expenses for fuel and wages increased by significantly more, resulting in a decline of more than 15 percent in net income. Maritime and domestic waterways revenues slipped from $27 billion in 2002 to $26 billion in 2003. That decrease was blamed on a decline in traffic volumes.

Revenues also rose on the airfreight side. Domestic freight forwarders' revenues rose from $9 billion to $10 billion. The air transportation sector achieved similar gains, from $27 billion to $28 billion, as international airfreight revenues rose by $1 billion while domestic business remained flat. Taken together, rail, water, and air transportation accounted for $111 billion in 2003.

The State of Logistics Report also discusses revenues for the third-party logistics industry, but those numbers are folded into other expenses for calculation purposes. (Third-party logistics did not exist in the United States when the original formula was devised.) According to figures supplied by 3PL analysts Armstrong & Associates Inc., U.S. companies spent $76.9 billion on logistics outsourcing—an increase of 8.2 percent over the previous year's expenditures. Net revenues for some functional areas, including dedicated contract carriage, domestic transportation management, and warehouse-based services, grew by more than 20 percent, according to Armstrong's estimates.

Shipper-related costs and logistics administration costs each jumped by $1 billion over figures for 2002. Shipper-related costs, which combine the costs of loading and unloading transportation equipment and the operation of traffic departments, were estimated at $7 billion. Wilson calculated logistics administration costs as representing 4 percent of total logistics costs, or $36 billion.

This year's data fit the historical pattern of declining costs seen since 1982. At that point, the federal government had decontrolled three of the four major transportation modes: trucking, air, and rail. Since then, inventory-carrying costs have declined by more than 60 percent, transportation costs have declined by 20 percent, and total logistics costs have fallen by 41 percent.

Logistics managers will be hard-pressed to restrain those costs in the future, in Wilson's view. That challenge will come from globalization. As production continues to shift to lower-cost manufacturing sites, U.S. companies will have to rethink inventory holdings and positioning while managing higher international transportation costs.

All indicators point to higher volumes of international shipments due to increasing global trade. Indeed, Wilson notes, trade expansion and global production gained considerable momentum in the second half of last year. World merchandise trade ended the year 4.5 percent above the 2002 mark, and global GDP rose by 2.5 percent. The World Trade Organization is predicting even faster growth in 2004, forecasting that world trade will shoot up by 7.5 percent and world GDP will rise 3.7 percent.

The additional tonnage resulting from such accelerated growth in international trade has strained ocean shipping capacity, resulting in higher rates for shippers. Last year, for example, cargo volumes jumped by 6 to 10 percent on eastbound Pacific trade lanes as U.S. imports from Asia spiked. Wilson notes that prices for inbound trans-Pacific container service in 2003 shot up by 40 percent on average and will likely rise another 20 percent this year.

China continues to play the role of dynamo in driving world trade. China's imports expanded by 40 percent and its exports grew 35 percent in terms of value. Shipments moving to and from China now account for more than one-fourth of all containerized cargo worldwide.

The surge in trade growth coincided with the imposition of new security rules to safeguard U.S. shores. Implementing those rules is certain to raise total logistics costs; to what degree is still uncertain. "While no one denies the need for the new security measures," Wilson writes in the report, "the cost of meeting the requirements has yet to be determined, nor who will bear the brunt of those added costs."

If anything will be able to hold back the costs associated with globalization and tighter security requirements, it will be the sharing of timely, accurate data. The plethora of documents required to comply with trade regulations has long been an impediment to participation in global markets. But information sharing offers a way for companies to collaborate and to "enable flexible decision-making in response to changing conditions, to prevent service disruptions, and to ensure supply chain security," Wilson writes. "Harnessing the data that is already available and seeing that it is shared with the right partners will enhance supply chain performance."

Despite the gains in logistics performance over the years, it's likely that globalization will create a host of new challenges for logistics managers and their companies. "The industry must find innovative ways to adapt to growing trade, rapidly changing supply markets, and constrained capacity," Wilson asserts. "The new solutions will include ever-increasing information sharing and more individualized supply chain planning."

For logistics managers, that means finding ways to accelerate the flow of goods through their supply chains while at the same time controlling costs. "The ability to respond faster to changing customer needs, combined with the flexibility to adjust manufacturing and delivery cycles, will provide the competitive edge in today's global environment," Wilson concludes.

Our Annual Report Continues

Turn the page to read how the major developments of the past year affected five major segments of the transportation industry: LTL, truckload, rail and intermodal, ocean shipping, and air freight.