2010 logistics costs go up despite better inventory management, study says.
U.S. logistics costs increased 10.4 percent, or $114 billion, to $1.2 trillion in 2010 because there were more shipments as the economy recovered from the recession and indirect costs for storing inventory increased, according to the 22nd annual State of Logistics report authored by Rosalyn Wilson.
| Wilson |
Logistics costs as a percent of gross domestic product — a barometer of the logistics’ systems efficiency — bounced to 8.3 percent from 7.8 percent in 2009. Last year’s figure was still the second-lowest in the past decade.
Despite a renewed emphasis on techniques to significantly shrink inventory levels and reduce operating costs, stocks of merchandise and commodities began to swell again during the third quarter and approached the levels experienced at the beginning of the financial crisis in 2008, the report reveals.
The value of all inventory held across major industries climbed $199 billion to almost $2.1 trillion. During the first quarter, business was good for international and domestic freight carriers as businesses replenished stocks worked down to the bone when demand for new orders evaporated. Some retailers were cautious about placing orders in the second quarter as their inventories mounted. In the second half of the year, inventories sprouted $170 billion because holiday sales failed to meet expectations, as many people waited until late in the season to take advantage of discounted merchandise, Wilson explained.
The report, published by the Council of Supply Chain Management Professionals, said inventory carrying costs rose 10.3 percent even though interest rates for holding goods declined again, and a glut of warehouse space led to a 6 percent reduction in leasing expenses. The reason was attributed to a sizable increase for costs such as depreciation, taxes and obsolescence (new entrants in the market kept insurance prices flat) related to the higher inventory levels.
The inventory-to-sales ratio hovered in the 1.25 to 1.27 range last year after spiking in early 2009 to 1.48 when consumers drastically cut back purchases.
Inventories and associated costs grew last year even as retailers, in particular, made a concerted effort to match orders with current demand and maintain much leaner inventories in hopes of avoiding late-season fire sales of slow-moving merchandise. Companies mostly determined they could not afford to maintain safety stocks.
Some of the methods many retailers now emphasize include synchronizing shelf, storeroom and distribution center stock levels, aligning shelf capacity and store reorder points with shipping quantities and frequencies, reducing the product variety in stores but offering greater selection through the Web, and adjusting package sizes to meet store needs.
Transportation. The other main component of logistics activity is transportation. The cost to deliver goods climbed 10.5 percent last year, the State of Logistics report said. The cost of trucking, which hauls the vast majority of the nation’s goods, increased 9.3 percent on a 5.7 percent rise in tonnage, while the cost for other transport modes combined increased 15.4 percent.
A large portion of the increase was due to fuel surcharges, as carriers tried to recover their costs from escalating fuel prices.
Railroads were the big winners with revenue jumping 21.8 percent — more than offsetting the 20 percent decline in 2009. Increases in carload (7.3 percent) and intermodal (14.2 percent) volumes represented the largest annual percentage increases since 1988. Railroads, however, did not regain all of the volume lost in 2009.
Wilson continued to warn shippers of a pending shortage of trucking capacity. The rebound in freight traffic last year did not come close to making up ground lost in the recession. Motor carriers maintained discipline on equipment acquisitions even amid signs the economy was improving. Many fleets scrapped vehicles without replacing them, parked quality equipment or sold assets in the used truck market. More than 3,000 trucking firms have declared bankruptcy in the past three years, a loss of 13 percent of industry capacity, the report noted, citing work done by Donald Broughton of Avondale Partners.
Analysts say trucking failures could accelerate this year as banks look to take advantage of a rehabilitated used truck market and repossessed trucks from delinquent customers who previously were allowed to slide on their payments.
“Truck orders picked up at the end of the year, a good indicator that carriers had high expectations for 2011, but the level of sales actually does not even cover the normal replacement levels,” Wilson wrote.
Investment in new vehicles remains difficult for many companies, due to the high initial cost for trucks, up 25 percent in the past five years because of clean emissions technology, the increased life cycle costs associated with new heavy tractors, and still tight credit markets, she added.
A bigger concern than finding adequate supply of trucks to move goods when the economy picks up is the available driver pool, trucking industry officials say.
Trucking lost 13.4 percent of its workforce during the last four years and there are fewer younger people entering an industry where one in six drivers is age 55 or older. Less than a quarter of current drivers are under 35 years old. Volume is already rising faster than new drivers are being added to fleets, according to the report.
Experts say trucking companies eventually will have to raise pay and shorten lengths of haul in order to attract over-the-road drivers.
Costs for ocean container transport increased 14.1 percent. Rates soared during the first half of the year, when ships were mostly full during the inventory replenishment phase for businesses, but they weakened considerably after August as demand softened and some carriers lowered prices in a gambit for market share. Rates were supported by the hundreds of ships placed out of service during the downturn, but lines are adding existing ships and new orders to their active fleets.
Revenues for air carriers grew 11.2 percent in 2010.
Shipper Response. Retailers and other companies are taking different approaches to supply chain investment and restructuring in response to the economic slowdown depending on their financial strength, said John White, president of supply chain management consultant Fortna Inc., during a panel discussion in Washington about the findings.
Some clients feel an urgent need to improve their sourcing, warehousing and distribution, while others are putting network reorganizations on hold because of the difficult business environment.
He noted that Amazon built the largest number of distribution centers last year, reflecting the growth in retail industry’s direct-to-consumer segment.
Companies are asking more strategic questions about how fuel, warehouse network design, foreign sourcing, interest rates and other factors impact supply chain costs, rather than just focusing on low inventory levels, White added. Nonetheless, keeping inventories extremely lean is a major goal of retailers since the recession — to the point that stockouts are occurring that never would have happened before, he said.
Macy’s in the past year has made a major effort to deal with the economic volatility by stabilizing its supply chain costs, said Jeff Pilof, group vice president for transportation, during the event. The department store chain is focused on ways to move goods using fewer trucks, either through better load planning or shifting a large amount of volume to intermodal transport, and streamlining its logistics processes.
Macy’s joins a growing list of retailers like JC Penney and Lowe’s that have embraced intermodal in the past couple of years as railroads demonstrated they could maintain service reliability as fuel prices escalated.
The large merchandiser is also one of 40 companies utilizing an online matchmaking service developed by the Voluntary Interindustry Commerce Solutions Association (VICS) to reduce the number of trucks making empty return trips after a delivery. Carriers with empty or partially empty trailers can search for pre-qualified shippers with freight headed to a destination along the return route.
When trucks travel without a return load the shipper’s rate is higher to help cover costs for the second leg of the trip or the carrier doesn’t collect any revenue, and the opportunity to reduce air pollution is lost because more trucks have to be used to haul shipments.
VICS is dedicated to facilitating supply chain collaboration for the consumer goods industry through the development of best practices and standards for planning, operations and data exchange to improve service and reduce costs.
The VICS system, an alternative to searching broker boards or manually calling clients and vendors, allows for-hire carriers, private fleets and shippers to post their respective transportation needs and be more selective by searching within their own network.
VICS charges $1,600 to $1,850 per year to use the service.
Macy’s primarily partners with Schneider National, one of the largest trucking companies in the United States, on the Empty Miles Service.
National Retail Systems Inc., another logistics and transport provider, said it can save 3,700 gallons of diesel fuel each year, or $15,000, for each 500-mile lane in which it can find a weekly backhaul, according to a case study on the VICS Web site.
JC Penney said it utilized 4 million empty miles, 20 percent of its total empty miles, by cutting 30,000 backhaul loads in 2009 and using its contracted fleet more, for a savings of $5.6 million. In 2008, the retailer was only able to take advantage of 6 percent of its 20 million empty miles.
Macy’s also developed a program to aggregate less-than-truckload and multistop shipments to full truckloads, making it easier to process vendor routes. The initiative increased truckload and intermodal routings by 140 percent and increased cartons moved per inbound appointment by 24 percent, according to VICS.
DC Bypass. Another way Macy’s is taking waste out of the supply chain is through a direct-to-customer import logistics model that enables many of its shipments to eliminate a distribution center stopover.
“DC bypass” has grown in popularity as a logistics practice, especially for seasonal and trendy products, because it can:
• Help reduce inventory and inventory carrying costs.
• Eliminate handling steps and fees.
• Reduce transportation and fuel
purchases.
• Limit opportunities for damage, routing errors and theft.
• Speed transit time by one or two weeks.
The technique involves sorting, labeling, pricing, radio-frequency identification tagging and boxing goods in store-ready packages at the manufacturer’s facility or a third-party logistics provider’s warehouse in the source country. The products are shipped to the United States where they are deconsolidated and sorted at a 3PL warehouse for direct delivery to a customer’s store or regional distribution center. That differs from the traditional model of first sending goods to the vendor’s distribution center near the port of entry, then shipping them to the retailer’s central distribution center that might be far from the ultimate destination, prepping the products, and then delivering them to regional DCs or to stores.
Logistics professionals say DC bypass works best for companies that can determine in advance where merchandise needs to go instead of bringing inventory to a warehouse and waiting for store orders because of uncertainty about demand. Systems must be set up to reflect the new distribution patterns, and stores need to be able to directly receive imports, often in smaller, multiple deliveries.
Businesses considering a DC bypass solution also need to be confident that they have sufficient inventory levels to accommodate various snafus that may arise, according to a white paper published last fall by forwarder Purolator USA, a subsidiary of Canadian express delivery company Purolator Courier. Excess inventory needs to be available to address inevitable problems that occur, including breakage, wrong sizes/colors or errors in model numbers. For most retailers, running out of stock and disappointing customers would wipe out any benefit derived from DC bypass, it said.
Pilof, who is chairman of the Voluntary Interindustry Commerce Solutions Association’s DC Bypass Subcommittee, told American Shipper that Macy’s will save more than $5 million this year from its fledgling DC bypass program.
The company began pilot testing the program in 2010 and is fully committed to the strategy this year.
The retailer is able to create purchase orders so that apparel assortments, for example, can be combined and prepacked in a carton by size, color and other characteristics by its 3PL in Asia, where labor costs are lower.
Doing value-added logistics consolidation further upstream and in a more linear fashion also allows the company to maximize container utilization and be more agile, he said.
“It eliminates the need for inland transit … because the assumption was we had to have it sitting in a DC in the United States,” Pilof added.
Home goods, such as kitchenware, are best suited for DC bypass because there are fewer items in a carton, which makes it easier to fulfill orders for final store presentation. But Pilof said Macy’s intends to expand the approach to small ticket items and generate even greater savings in the near future.
Macy’s revamped replenishment model also includes the use of more frequent, smaller orders to reduce the merchandise surplus that has to be sold off at steep discounts each season. This summer it is testing the use of item-level RFID tags to quickly determine what is selling at the store level and place more targeted orders for new stock, Pilof said.
Like many retailers, Macy’s is also moving to a more integrated inventory management strategy for its physical store, online and catalog channels. More sophisticated technology has given companies better visibility into their inventory throughout the organization so they can access it from anywhere. The goal is to reduce duplicate inventory and the need for specific distribution centers for each sales channel.
“That’s not something we’ve been able to do in the past,” Pilof said.
