U.S. logistics costs took bigger bite in 2007
U.S. logistics costs rose 7 percent, or $91 billion, to a record high of $1.4 trillion in 2007 driven largely by soaring fuel prices and extra costs to hold slow turning inventory in a soft economy, according to an annual report that tracks trends in logistics spending.
Logistics costs represented 10.1 percent of the Gross Domestic Product, crossing a double-digit efficiency benchmark for the first time since 2000, when logistics costs were 10.3 percent of the overall economy.
Last year marked the fourth consecutive record high for logistics costs, but the growth in logistics expenditures slowed from 11 percent in 2006, when logistics costs represented 9.9 percent of GDP.
Although transportation and inventory costs increased relative to economic productivity, the difference was the slowing economy rather than poor logistics management or inefficiency, said Rosalyn Wilson, author of the State of Logistics Report.
| Wilson |
“The last two years have been a severe test of the ability of our industry to adapt and survive in a very tough economic climate. In late 2005 and early 2006 we were evolving the supply chain to more efficiently meet the challenges of a global marketplace” by addressing port and rail capacity constraints, spreading out peak shipping seasons and investing in information technology to improve shipment visibility and dynamic rerouting, she wrote. “Managers have the tools and experience to track sales and inventory levels more closely and make immediate adjustments to impact the bottom line.”
The 19th edition of the report was sponsored by the Council of Supply Chain Management Professionals.
The transportation component of logistics costs increased 6.1 percent relative to GDP, up $70 billion to $857 billion.
The economic downturn has hit the trucking industry especially hard. Motor carrier costs increased by $36 billion in 2007 to $671 billion, but much of the gain was attributed to revenue from fuel surcharges. Actual tonnage declined 1.5 percent last year on the heels of a 1.3 percent drop in 2006.
Wilson and other logistics professionals warned that shippers are on the cusp of a major truck capacity shortage when the economy recovers. She cited work by Avondale Partners analyst Donald Broughton that nearly 2,000 trucking firms failed in 2007 and another 935 companies went out of business in the first quarter of 2008. Unlike past recessions, bigger trucking firms are also part of the rationalization as the average fleet size of shuttered companies was 45 trucks compared to 27 trucks in the 2001 downturn. Last month, Jevic Transportation, the 71st largest contract carrier, closed its doors. The numbers are considered conservative because they don’t track independent drivers who operate less than five rigs.
Logistics experts are warning of a worrisome trend in which transportation assets are permanently leaving the market as capacity declines. Many trucking firms also are idling parts of their fleets and not buying new equipment to reduce costs until demand picks up again, while others are selling off assets or switching to an asset-light model. Slack freight volumes so far have masked the capacity cutbacks, as well as a well-documented driver shortage.
About 3 percent of the tractor fleet, or more than 45,000 vehicles, disappeared in 2007, according to ACT Research. Broughton estimates that another 42,000 trucks, or 2.1 percent of the nation’s capacity, were idled in the first quarter of this year.
“Unlike previous cycles when a truck was an idled asset awaiting a signal from the economy that it could re-enter the nation’s fleet as capacity again, now capacity is being eliminated. While that may be rational in an environment where there still are too many trucks chasing too few loads, it actually will foster another capacity crisis” and push shipping prices up when the economy rebounds, Wilson wrote.
Capacity is also being constrained by new hours-of-service regulations, highway congestion and the trend to more regional and shorter lengths of haul that bring with them more wait times and less efficient operations.
The loss of capacity will make the freight backlogs of 2004 and 2005 “look like a cakewalk” compared to the upcoming recovery, said Jim O’Neal, president of O&S Trucking Inc., during a panel discussion of the report at the National Press Club in Washington.
For the fourth year in a row, inventory carrying costs have risen faster than transportation costs, and accounted for 44 percent of the 2007 increase in logistics costs. Inventory carrying costs rose 9 percent while transportation costs were up 5.9 percent above 2006 levels, mostly due to an 8.7 percent increase in inventories and slightly higher interest rates.
Continuing a trend that began last year, growth in wholesale inventories, 9.2 percent, outpaced that of retail inventories, 2.3 percent. The logistics industry has evolved in the past several years towards a model of more regional warehouses sites to serve local markets with just-in-time deliveries. Retailers are also squeezed for cash and looking to reduce inventory as low as possible.
Wilson predicted that logistics costs would claim an even greater share of GDP in 2008. She said an economic recovery now appears slower than some hoped, as recent figures on wholesale and consumer inflation, unemployment, and the depressed housing market have worsened. Shipments of construction materials will not pick up until mid-to-late 2009, and demand for appliances and furniture will also stay low, impacting freight levels. Her assessment of mid-2009 before the economy improves dovetails with a quarterly survey of more than 1,000 chief financial officers by Duke University and CFO Magazine that shows 71 percent of the executives think that the U.S. economy will not turn around until 2009, with 54 percent saying progress won’t happen until next summer.
The United States broke the 10 percent barrier on logistics costs as a proportion of GDP in 1999. Logistics costs had stayed below the 10 percent level since 2001, hitting a low of 8.6 percent in 2003 compared to 12.3 percent in 1985. ' Eric Kulisch