U.S. logistics costs reach 9.9% of GDP in 2006
Logistics costs for U.S. businesses rose 11 percent in 2006 to $1.31 trillion, outpacing the economy (3.5 percent) and nearing the psychological threshold of 10 percent of productivity relative to the whole economy, according to an annual report that tracks trends in logistics spending.
It was the third straight year that logistics costs have risen in nominal and real terms after two decades of efficiency improvements in packing, storing and transporting goods had brought such costs to historic lows.
U.S. logistics costs represented 9.9 percent of the Gross Domestic Product, up from 9.4 percent in 2005, on the strength of high interest rates that drove up inventory costs and fuel surcharges passed on by freight carriers, according to transportation consultant Rosalyn Wilson, who authored the 18th annual State of Logistics report.
Wilson said the higher spending figures represent the evolution from domestic sourcing of raw materials and work-in-progress inventory from domestic suppliers to increasingly complex, global supply chains and the realization that higher inventory levels are necessary to avoid business disruption, rather than any decline in effectiveness of logistics methods.
Increasing safety stocks to mitigate the effects of bad weather, accidents, labor strikes, security crackdowns and other events on transportation, Wilson said, is a sound business decision in an era when shippers have less control over freight moving on an international landscape. Despite the far-flung supply chains, manufacturers and retailers are demanding reliability and predictability in their shipments.
“We are definitely managing inventory better. It’s not like we’re storing it here in the corner. We’ve got tremendous growth in technology and added value” processing, and extra handling between transport modes, she said at a press conference announcing the release of the report. “We are not moving things domestically, we’re moving them globally. By definition, those costs have to go up.”
Without the sophisticated logistics management systems and outsourced logistics expertise used today, logistics costs would be much higher than they are, she added.
Logistics costs increased $130 billion in 2006. U.S. businesses in 2006 spent $809 billion on transportation, which accounts for more than two-thirds of logistics spending, up from $739 billion the year before. But for the third year in a row, inventory carrying costs have risen faster than transportation costs, according to Wilson’s report.
In 2006, inventory carrying costs jumped 13.5 percent, to $446 billion, while transportation costs were up 9.4 percent over 2005 levels. The increase was due to much higher interest rates and a rise in inventories.
The annual interest rate for commercial loans jumped to 5 percent, a 52 percent rate hike, and remains at that level today.
The average value of all business inventory was almost $1.9 trillion, up nearly $109 billion from the prior year.
Contrary to perceptions that companies continue to winnow inventories in their distribution centers and stores to the leanest possible level, the real trend identified by Wilson is that retailers are pushing the responsibility for holding inventory down to their suppliers.
Inventory levels have grown consistently over the past five years, but in the last two years the growth has shifted from retail to wholesale. In 2006, inventories for retail goods increased 2.8 percent, while inventories for wholesale trade went up 9.5 percent, according to Department of Commerce statistics.
“Suppliers now have to hold inventory in various segments of the supply chain to meet the just-when-we need-it demand of retailers like Home Depot and Target,” she wrote. “Rather than one large shipment a day or every other day to stores, they are reporting multiple deliveries in one day to meet their customer’s requirements,” precipitating a move towards use of more local warehouse sites serving fewer locations. Wholesale distributors are now holding more goods longer than in the past.
The trend is exemplified by Wal-Mart and its Remix strategy, which segments its distribution centers to handle high-demand and slower-moving goods. Rather than doing large store deliveries at night, Wal-Mart is resupplying them throughout the day for certain products. Wal-Mart is issuing smaller, more frequent orders instead of storing several weeks of consumer goods in its distribution centers, forcing suppliers to use consolidators to handle inbound logistics to Wal-Mart.
Costs for trucking, which represents the largest piece of transportation costs, increased 8.8 percent to $52 billion in 2006. Demand for trucking services dramatically dropped in the second half of the year as the downturn in the housing and automotive sectors took hold. But many motor carriers still finished the year with strong revenue growth based on first half sales and collection of fuel surcharges from customers.
The United States broke the 10 percent barrier on logistics costs as a proportion of GDP in 1999. Logistics costs have stayed below the 10 percent level since 2001, hitting a low of 8.6 percent in 2003 compared to 12.3 percent in 1985.
The State of Logistics report was sponsored by the Council of Supply Chain Management Professionals.