State of Logistics 2010: Business logistics costs fall 18.2 percent

By John D. Schulz, Contributing Editor

WASHINGTON—Business logistics costs fell to a record low of 7.7 percent of Gross Domestic Product last year, compared with 9.3 percent of GDP in 2008, according to a new annual benchmark report issued Wednesday.
 
The 21st annual State of Logistics report, released by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics at the National Press Club, details the effects of the two-year recession that began in 2007.
 
Logistics costs last year accounted for 7.7 percent of GDP. That is an historic low, less than half of the 16.2 percentage when the first SoL report was authored in 1981, the first full year of trucking deregulation.
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Transportation costs now account for 4.9 percent of GDP, well below the 6 percent share in 2008. Carrying costs accounted for 2.5 percent of GDP last year, down from 2.9 percent in 2008 and well off the 8.3 percent of GDP in 1981.
  
The cost of U.S. business logistics fell 18.2 percent last year, the largest decline since the SoL report was started in 1981. Business logistics costs fell to $1.1 trillion last year, a decrease of $244 billion from 2008. Combined with the drop in 2008, that means total logistics costs have dropped nearly $300 billion during the recession.
 
Carriers have responded by reducing capacity, especially in trucking and air freight. But Rosalyn Wilson, the report’s author, warns shippers that the current “tenuous” business climate and tightened credit “will make it difficult to rapidly expand capacity” for the rest of this year.
 
“It is likely that we will have capacity problems in some areas by year’s end,” Wilson says.
  
After rising over 50 percent in the five years leading up to the recession, total logistics costs have fallen the past two years. Transportation costs were down more than 20 percent last year.
  
With the exception of oil pipelines, all modes suffered double-digit rate declines last year:
-Trucking, which accounts for the lion’s share of freight transport, was hard hit with truck rates falling 20.3 percent.
-Rail rates were off 20.6 percent, with carload traffic down 16.1 percent and intermodal falling 14.1 percent.
-Water rates were off 21.6 percent. Except for Oakland, all the rest of the Top 10 U.S. ports showed declines in Ton Equivalent Units (TEUs).
-Air freight, the smallest of all freight sectors, was off a stunning 27 percent last year.
-Warehousing costs fell 2 percent.
But Wilson warns that shippers should not get too comfortable with these bargain freight rates. Capacity restraints, already beginning to show in some modes, will result in higher rates, perhaps as soon as this year.

Vince Hartnett, president of Penske Logistics, says shippers are “very cautious” about the future. Cash and capital will be very important over the next 18 to 24 months. “There is certainly a lot of caution out there,” Hartnett says.

John Lanigan, executive vice president and chief marketing officer of Burlington Northern Santa Fe, says his railroad will bring back capacity “if demand is there.” He says customers are reluctant to give long-term forecasts.
 
“We have a lot of latent capacity that is idle right now,” he said. “But it’s not an overnight thing. We don’t have trouble bringing the assets back, but we can’t do it tomorrow.”
 
Shippers utilizing air freight and trucking are particularly vulnerable to coming rate spikes, Wilson warned. She notes a recent Air Transportation Association report that showed 12 percent of air cargo capacity was lost last year, with widebody freighter capacity down 22 percent.
 
“The air freight industry is experiencing one of the most intensive shortages of capacity,” Wilson explains. “This has led to spiraling rates and even a shipment backlog.”
 
Trucking is right behind. More than 2,000 trucking firms, mostly smaller carriers, went out of business last year. Analyst Donald Broughton of Avondale Partners has forecast another 2,000 trucking firms will be driven out of the industry this year because of higher operating costs and lower demand.
 
Another factor is the growth of 3PLs. Wilson says during the recession “many shippers abandoned long-standing relationships carriers in favor of the spot market or the use of 3PLs.” These pressured trucking companies to cut or at least hold rates, Wilson says.
  
Wilson is predicting capacity restraints by the end of the year, with both equipment and truck driver shortages. Trucking industry capacity is adequate now but “as demand grows, there is not sufficient parked capacity to quickly respond” to any surge in demand, Wilson predicts.
 
“For those that have survived the recession, the future looks bright,” Wilson says. “Capacity is going to tighten and rates are going to rise. Shippers would be wise to be first at the table negotiating rates and capacity.”
 
Don Ralph, senior vice president of supply chain logistics for Staples Inc., says volatility is one of the constants in his business nowadays. Ralph says he is expecting “modest” rate increases this year following the “precipitous” drop in freight rates the past year.