Let's get this out of the way right now: The state of logistics is good. Yet if you look at that all important number—logistics costs as a percent of GDP—you'll notice that it's just a hair under the magic 10 percent mark. In fact, in terms of dollars, logistics costs in 2006 were $130 billion higher than 2005, ringing in at $1.31 trillion.

Higher transportation costs and higher inventory carrying costs, combined with moderating growth in the overall economy, pushed us to the edge of a double-digit figure. The last time business logistics went above 10 percent of GDP was in 2000. So how can we say the state of logistics is good?

Because now, more than ever before, logistics managers are working together with their carriers and service providers to make a difference in supply chain efficiency and security. This year's report contends that without the collaboration, innovation, and education that characterized logistics professionals in the past year, costs could have easily proceeded further north of 10 percent for the first time in a long time.

“There are more resources available to know how to plan a move,” says Rosalyn Wilson, an independent consultant with over 30 years of experience in the transportation field. Wilson researched and wrote of the 18th Annual State of Logistics report under the auspices of the Council of Supply Chain Management Professionals (CSCMP). “Shippers are now armed with enough knowledge to discuss things with their 3PL providers. They can now set some realistic expectations, and shippers are taking the responsibility to know that.”

According to Wilson, different people in organizations are now making decisions they traditionally didn't have to make. Before, the only things wholesalers and suppliers to Wal-Mart and Target needed were giant warehouses and the trucks necessary to make weekly deliveries. Now logistics managers are thinking more strategically about where to locate that inventory so they can meet a four-hour service window. And they're doing that, stresses Wilson, by relying on a mix of global logistics resources, human and technological, inside and outside their own four walls.

Wal-Mart has learned that the best way to manage its inventory is to push that responsibility back on its suppliers. Now suppliers have to do something they never had to do before: collaborate.

That means a greater variety of warehouses and warehouse services. Warehouses are increasingly being used as value adding or processing centers employing more packaging, light assembly, RFID tagging, and sorting. And warehouses are holding higher levels of strategic reserves to meet surges in demand or to respond to disruptions in the supply chain.

“There's a much higher degree of collaboration,” Wilson says. “Shippers are now willing to share information that they didn't want to share before, so everybody can make better decisions.” As a result, adds Wilson, we didn't see a holiday surge last year because we've changed our shipping patterns—not only from where we're bringing stuff in but we've time shifted it, spread it out. “We're moving breakbulk facilities further inland—taking that stuff out of the way so we can keep things moving at ports. The complexity has increased but we're beginning to master it,” she says.

Nevertheless, the higher demand for warehousing has also had the effect of pushing up rents for the facilities, further adding to logistics cost. Sometimes that's just the cost of doing business.

Wilson believes that if the trucking industry hadn't been so soft “the logistics cost as a percent of GDP” number would have been significantly lower. Demand for trucking services was relatively weak in 2006, particularly in the automotive and housing construction markets. Actual tonnage carried was down 1.3 percent in 2006 for the first time in many years.

Also for the first time in a long time, the railroads' revenues were healthier than trucking's. Fuel surcharges helped keep trucking revenues in the black, but actual tonnage carried by trucks was down. By contrast, the railroads carried more carloads than ever and there were record levels of intermodal loadings as well. While rail wasn't immune from the drop in automotive and housing sectors, coal insulated rail from the damaging effects.

However, what makes Wilson optimistic about trucking is that it's showing signs of adaptability in the face of several challenges. For example, she's seeing a new job function beginning to surface: a sales agent for loads.

“Some small truckers and independent operators told me they were turning down loads because they couldn't get a backhaul and couldn't economically justify taking the front haul without the back haul,” says Wilson. “There was so much competition for the available freight that the carriers couldn't raise rates, or even pass through the fuel surcharges that some of the bigger companies were able to pass through. One manager for a company with 11 rigs said he needed to be 100 percent engaged to be able to meet his bottom line.”

With the economy chugging along and unemployment rates at historical lows, there is much competition for the available pool of drivers. All segments of the industry experienced increases in turnover rates, with long-haul turnover up to 121 percent and short-haul turnover down slightly to 112 percent in the fourth quarter of 2006, according to data from the American Trucking Associations (ATA).

The rail industry, on the other hand, was fully engaged in 2006 according to Wilson's report. It didn't witness as many capacity issues, on-time performance has gone up, and their average train speed inched up. So, the rail industry did not lose in this softer market.

Rail transportation costs did go up over 12 percent in 2006, however. Revenues for Class I railroads showed the most gain. Rail carloadings were up 3.1 percent over 2005 and intermodal loadings were up another 5 percent. Setting yet another record high in 2006 was total freight volume, estimated at 1.77 trillion ton-miles, up 4.5 percent from the previous record set last year.

Another indicator of the increased health of the rail industry is the freight revenue per ton-mile figure which has risen from 2.354 cents per ton-mile two years ago to 2.84 cents in 2006—that's more than a 20 percent gain.

Traffic levels are expected to continue climbing so capacity expansion will be a key issue in the future. The Association of American Railroads (AAR) reports that railroads plan to spend massive amounts this year—$9.4 billion—of private capital to add capacity where it is needed to meet the growing demand.

Maritime and domestic water traffic spending increased by 7.9 percent, or almost $3 billion in 2006, with most of the growth in ocean freight. However, the U.S. inland waterway system is not a growth sector of this industry. Aging infrastructure and deferred maintenance is taking its toll on the system and preventing it from operating optimally. The nation's ports experienced another year of high traffic levels and handled it with few, if any major, incidents. Shipping patterns have changed in response to the peak capacity problems of a few years ago.

Air freight revenue increased by $3 billion during 2006, an increase of 7.6 percent and much lower than the more than 17 percent increase measured the previous year. The air industry represents 45 percent of the value of goods that move offshore—and that number is continuing to grow.

Fuel is the industry's top cost and now constitutes 20 to 30 percent of industry operating expenses, outstripping even labor. Preliminary figures for the air cargo industry indicate a strong performance with overall ton-miles up 4.4 percent over 2006 and up over 22 percent since 2000. Domestic air freight accounts for about 71 percent of the total and international about 39 percent. This sector of the industry remains strong as demand for its services grow.

According to Wilson, inventory levels were up again and inventory carrying costs were up 13.5 percent. Interest rates in 2006 were almost double that of 2005's. Warehousing costs grew by 12 percent due to an expansion in the amount of warehousing available and increasing rates and rents. What added to this activity was the variety of smaller shippers and carriers with fleets of 15-20 vehicles getting into the inventory management game.

“I'm seeing a lot of these companies beginning to lease warehouses,” Wilson says. “One fleet manager hired a junior guy from a 3PL to do his marketing for him and he just won his first couple contracts, leased a warehouse, and they're doing packaging and attaching RFID tags for a retailer. So we have new players entering that value added service niche, and that caused a blip in that demand for warehousing because they need a place to do it.”

Forwarder revenue grew to $28 billion in 2006, up from $22 billion in 2005. Part of this rise is attributable to the fact that more C- level executives are realizing that their transportation and procurement managers need to be talking.

“Departments aren't as compartmentalized any more,” Wilson says. “The supply chain is global and outsourced. This decision here affects this decision there. Companies will start looking at their total cost.” That means companies may start carrying more inventory here in the U.S. rather than in facilities overseas. This will help them better manage their risk of supply chain disruption and avoid competition for goods as the consumer markets in other countries grow.

Who is holding the inventory? According to Wilson, retailers are holding less and their suppliers are holding more. Retail inventories only grew by 2.6 percent last year, but wholesale inventories, where the suppliers hold their goods, is up 10 percent.

“You're reading headlines where Wal-Mart and Home Deport and Target are saying they've leaned their inventories but what they've actually done is push inventory down the chain,” Wilson explains. “A supplier told me he makes deliveries every two or three days to Target, and these are truckload deliveries with a lot of product. Or, it may be one carton or a case of toilet paper because a store is only keeping one case in the back. So we're actually holding more inventory.”

Where logistics is better than five years ago, adds Wilson, is the ability to meet that four-hour service window. Logistics managers are getting smarter.

“We've seen a long term trend to shifting the buying and delivery period for known things like Christmas and other holidays and that's where we would typically see the bottlenecks in August or September at the West Coast ports,” she says. “That didn't happen last year. There's been a big shift in taking advantage of other ports. There's work being done on the Panama Canal and new projects that are about to come online at ports all along the East Coast and in the Gulf of Mexico, adding huge container processing facilities.”

Wilson notes that right now, 75 percent of freight that moves in the world moves in a container. Over the next decade that will rise to 95 percent with barges moving them via inland ports—hopefully alleviating some highway congestion.

Traffic on our nation's highways in the last ten years has increased 25 percent. Shippers and carriers now realize they can't point fingers and expect the infrastructure to take care of itself.

“Everybody understands that something has to be done about the infrastructure now, and everybody has to be involved,” Wilson says. “The ATA says they are willing to agree to an increase in the fuel taxes if the money will go to building new roads.”

So while logistics costs are higher in this year's State of Logistics report, they are starting to be seen as more than costs. They are the price of supply chain security. Wilson says this era of personal responsibility will enable industry to start making headway on many of its other problems.