Logisticians “survive the slump,” but costs hit 10.1 percent of GDP
Annual CSCMP report cites fuel costs as driver for increased logistics expenses
John D. Schulz, Contributing Editor -- Logistics Management, 6/19/2008
WASHINGTON—Driven by the relentless rise in fuel costs, American businesses spent a record $1.4 trillion on logistics last year. That was equal to 10.1 percent of the nation’s Gross Domestic Product, a percentage not equaled since 2000.
That’s the crux of the 19th annual State of Logistics Report released by the Council of Supply Chain Management Professionals in Washington on Wednesday.
Inventory carrying costs outpaced transportation costs, rising 9 percent last year. Transportation costs rose 5.9 percent last year and now account for 6.2 percent of nominal GDP.
Fuel has been the killer cost, according to Rosalyn Wilson, who authored the report. Despite the 5.9 percent increase in transport costs, most modes (except for railroads) reported significantly higher costs as well. Because freight volumes are lessening with the slowing U.S. economy, the ability for carriers to raise rates (except for fuel surcharges) is “very constrained,” Wilson noted.
Higher inventory carrying costs and transport costs combined to outpace the flagging U.S. economy, pushing logistics as a percentage of GDP into double digits for the first time since 2000. Still, logisticians deserve credit for productivity. In 1985, for example, logistics cost 12.3 percent of GDP, before enjoying a steady improvement through the early years of this century. The all-time low percentage was in 2003 when logistics costs a mere 8.6 percent of GDP.
Unless the cost of crude oil retreats back under $80 a barrel, those days may be gone forever.
“We will not see a return to prosperity for some time,” Wilson predicted. “I think logistics costs will claim an even higher percentage of GDP in 2008.”
Although Washington refuses to say the nation has entered recession, as Wilson said, “Neither have we entered a recovery. I expect more of the same for the rest of 2008 and then a very slow recovery into 2009. Traffic levels will rebound ahead of rate and revenue levels until supply and demand level out.”
The good news for shippers is multifold. First, there is plenty of capacity—at least for now. Secondly, heightened competition for fewer loads has severely constrained rates, particularly in trucking.
“Pricing power is firmly in the hands of shippers now, not the carriers,” Wilson said.
Shippers would be advised to enjoy it while it lasts. It may not be forever. Because more than 2,000 trucking companies have closed in the first quarter alone – Jevic Transportation, the nation’s 71st-largest carrier, ceased operations last month, for example – there is less capacity now in trucking than in the early part of this decade.
“The diminished industry capacity will have serious repercussions when the economy turns around,” Wilson predicted, “probably returning us to the crisis situation we experienced just a few years ago with backlogs and bottlenecks.”
Total logistics costs have risen in each of the last five years, rising 52.3 percent. Transportation accounted for 52 percent of the rise last year. For the fourth straight year, inventory carrying costs rose faster than transportation costs, and accounted for 44 percent of last year’s increase in logistics costs. The cost of warehousing rose 9.9 percent last year while transport costs rose 6 percent.
Trucking costs increased $36 billion last year, an increase of 6 percent of 2006 levels. The cost of rail transportation rose 7.4 percent as the rails posted their second-best year on record despite a 2.5 percent drop in carloadings. Freight revenue for the Class 1 railroads rose $3.6 billion last year, mostly through fuel surcharge increases. Rail operating ratios again were healthy, dropping to 78.3 last year from 78.6 in 2006 and 82.1 in 2005.
Transportation costs as a percentage of GDP is just about where it was 20 years ago. Logistics costs as a percentage of GDP crossed 10 percent for the first time in seven years. Still, this does not mean that logisticians are not doing a good job, Wilson said.
“One of the realities of a global supply chain is that delivering the goods now costs more,” she said.
Some shippers were not as pessimistic.
“I refuse to join the pity party,” says Kevin Smith, senior vice president of supply chain and logistics for CVS Corp., the drugstore chain. “We have a much more optimistic outlook than what is being presented.”
Rick Jackson, chief operating office for Victoria’s Secret Direct, agreed. “It’s a great time to be in supply chain. The spotlight is being turned on us a bit.”
One trucking company executive said his industry is about to emerge from a two-year slump with a vengeance because of bankruptcies and other factors that may create a capacity crunch in trucking when the economy rebounds.
“My sense from the truckload side is we are right on the precipice of a significant recovery,” said Jim O’Neal, president of O and S Trucking, Springfield, Mo. “You are going to see a very significant capacity situation that’s going to make 2004-2005 (undercapacity) look like a cakewalk.”
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