The 22^nd Annual State of Logistics Report, prepared for the Council of Supply Chain Management Professionals (CSCMP) was released this week (free for CSCMP members and can be purchased), and similar to the 2009 summary, the report provides interesting and perhaps troubling observations.

Let us begin with some of the summary highlights:

• U.S. business logistics costs increased by an overall 10.4 percent in 2010 to $1.2 trillion.  This represented 8.3 percent of U.S. GDP compared to 7.8 percent of GDP in 2009. Both of the major cost components, inventory and transportation increased.
• Industrial production was up 5.3 percent in 2010 after declining 11.2 percent in 2009, reflecting a bit of a comeback for U.S. manufacturing, but certainly not up to everyone’s expectations. Overall capacity utilization came in at 74.5 percent vs. 69.2 percent in 2009. The report further notes that there are signs the U.S. economy is stalling and predictions for a stronger showing in 2011 may fall short.
• The average investment in all business inventories increased to near $2.1 trillion, an increase of $199 billion from 2009. There was evidence of inventory restocking in Q1 of 2010, a sell down in Q2, with inventory increases returning in the latter half of the year.  The key 2010 inventory-to-sales ratio ended the year at 1.25, just about even with the 1.27 ending experienced in 2009.
• Freight volumes grew year over year, but at an unsteady pace with frequent spikes and valleys in monthly tonnage, carload, and intermodal and ocean container data.  This did not help with capacity planning

If you desire some contrasts to highlights from the 2009 data, you are welcomed to read our Supply Chain Matters commentary from last year’s report.

In terms of impressions and takeaways regarding the 2010 data, we certainly would point to the data reflecting the overall cost of carrying inventory as well as lingering structural changes within transportation infrastructure.

Inventory carrying costs primarily consist of financing, taxes, and depreciation, insurance and storage costs.  As we all know, interest costs are at an all-time low and the report notes that the annualized interest rate to finance inventories fell to .20 percent in 2010 from .26 percent in 2009. That amounted to a 15.9 percent drop in the interest component. The cost of warehousing fell 6 percent reflecting lots of excess available capacity. Insurance costs were also reported as flat. Taxes, obsolescence and depreciation however rose by 15.4 percent in 2010 reflecting what we believe are some problems on the financial side of the house.  Rather than CFO’s leaning on supply chain teams to take out more inventory, it may be time for financial teams to reexamine the means for accounting for inventories.

Another area to continue to watch is transportation costs, specifically what is happening within specific modes. Overall, transportation costs were reported as up 10.5 percent in 2010. Trucking, the largest component was up 9.3 percent with much of the increase attributed to fuel surcharges. Total trucking industry capacity has suffered during the recession with a reported 16 percent of truck capacity permanently removed since 2006. The trucking sector has also experienced the largest decrease in overall workforce.

Two other areas however reflect what we believe are disturbing trends. The cost of rail transportation soared 21.8 percent compared to last year’s 20 percent decline.  While volumes were up, rail car and equipment capacity remains underutilized with 316,271 cars, or 20.8 percent of the fleet remaining idle. Revenue per ton mile rose from 2.84 to 3.33 cents per ton-mile. This is disturbing because economics and sustainability efforts are steering more long-distance surface transportation toward intermodal rail and now is not the time for the railroads to make this option more efficient and economical, especially with excess capacity on the sidelines.  We highlighted in April how some rail carriers were unable to provide timely availability of railcars for major auto companies. Perhaps the Burlington Northern (BNSF) / Warren Buffet factor is a new perspective for the U.S. railroads.

Another troubling transportation area is water and ocean container transportation where costs were reported to rise by 14.1 percent.  It is no secret that that the entire industry suffers from overcapacity as ships ordered in pre-recession times continue to come on-line. Carriers however have been able to extract added fuel surcharges and rate increases via spot rates on popular routes while at the same time slowing down service and steaming rates to save fuel.  We previously penned our observations regarding this perplexing phenomena. Here again, many global shippers are incented by strategy to move more freight from air to ocean, and carriers have a short-term outlook on customer and volume growth.

Looking forward, the authors of the report predict a bumpy ride in 2011 with the U.S. economy potentially hitting a wall.  Overcapacity in rail and ocean and under capacity in trucking remain perplexing problems with industry self-interest the primary approach. The report authors again urges shippers to have a much stronger relationship with carriers and logistics providers and we tend to agree. While the rail sector is in the best position to take on more traffic, add more overall efficiency and help shippers reduce carbon and CO2 consumption, the industry seems anchored in short-term profit recovery vs. long-term strategy. As we noted last year at this time, the rail and ocean transport industry would be wise to help companies leverage on business recovery strategies along with improved and cost efficient services. Your capacity problem should not be that of your customer.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site where this author is a featured guest blogger.

This posting is a follow-up to our previous community commentary regarding the impact of higher inbound material prices on global supply chains. In January, Supply Chain Matters noted that the two most significant challenges in global supply chains for 2011 would be rising inbound material costs and product demand uncertainty. Two corporate statements this week now point to a pending business slowdown in emerging markets as another indicator of the interrelationships of these challenges.

An article in the Europe Business News section of The Wall Street Journal (paid subscription may be required) quotes the Executive Vice President of Nestle SA as indicating that natural and man-made disasters coupled with the spiraling costs of raw materials will impact sales in emerging markets in the coming months, especially China. Higher inbound material costs have caused price increases among food companies and these price increases are fanning inflationary forces as well as consumer unrest and pullbacks. Nestle’s Asia-Oceania-Africa zone was the fastest growing region in Q1 and accounted for around two-thirds of exposure to emerging markets. That region may now experience reduced growth. Although these forces will slow the rate of expected growth, Nestle cautions that overall growth from emerging markets will continue, albeit at a slower pace than originally anticipated.

As we noted last week, Nestle has acknowledged that price increases have to be selective, especially in the price-sensitive emerging markets, and is further implementing a number of strategies to overcome the impact of rising inbound costs. Mentioned strategies in this latest report are reducing waste and packaging, along with re-engineering products with cheaper materials. The article notes that target prices for goods distributed in countries such as Vietnam or China have been determined and where costs exceed these targets, other means of cost reduction need to be made.

Supporting these market slowdown announcements are media reports of a wave of violent worker unrest across urban areas of China as migrant workers feel the impact of lost jobs caused by industry sourcing shifts and vastly higher food prices brought about by inflation. China’s rate of inflation was reported as 5.5 percent in May. Violence has been reported in the southern China city of Zengcheng, a city of about 800,000 located close to the Guangzhou manufacturing region, along with other rioting in central China. Readers may recall that the recent multiple uprisings across the Middle East, or the so-termed “Arab Spring” have also been motivated by population unrest over the higher cost of food and staples. Civil war in the Ivory Coast caused Nestle to shut its factories in that region, and flavorings producer McCormick had to secure alternative sources of supply as a result of the uprising in Egypt.

Glencore International plc, who controls a large share of international trading among metals, minerals and agricultural commodities, also issued a warning.  In an article published in the Financial Times (paid subscription of free preview account required), the CEO of Glencore, Ivan Glasenberg, warned that high inflationary prices and the Chinese government’s actions to curb those forces have caused a pullback in China, and added his hopes that this pullback would be temporary. He in turn noted that China’s monetary tightening would be temporary and the pullback could be short-lived. Since industrial commodities are the first stage of many different industry value-chains, this current pullback will be felt within upstream portions of supply chains over the coming weeks.

The effects of rising inbound costs are not just reflected in internal supply chain impacts. They also impact external demand trigger points. This is an important consideration for having the sales voice on emerging markets demand as part of the sales and operations planning (S&OP) process. If there have been aggressive assumptions made relative to product demand growth stemming from emerging markets, now may be the time to revisit those assumptions and run some additional scenarios of lower growth.

What is the view from your organization?

Has product demand from emerging markets such as China started to decline or taper-off?

Bob Ferrari

Yesterday, President Barack Obama traveled to the U.S. manufacturing headquarters of LED lighting company Cree to meet and participate in a progress report from his appointed Jobs and Competiveness Council.  The White House Blog provided a detailed commentary of the event.

Supply Chain Matters readers may recall our previous commentary regarding the Council, and its chairperson, Jeffrey Immelt, CEO of General Electric. GE paid zero taxes in 2010, and that led others to question his leadership of the Council. Mr. Immelt however, understands manufacturing and supply chain disciplines and we continue to trust that the Council also understands them as well.

Yesterday, there were some announcements that came forward, including an all-hands-on-deck strategy to train 10,000 new American engineers every year. Other ideas presented to the President included an energy retrofitting program to make commercial buildings more energy efficient, and to build workforce skills in advanced manufacturing, among others

Supply Chain Matters applauds the progress of the Council thus far, but we hasten to add that the substance and timetable of initiatives needs to be stepped-up considerably, and with less political overtone.  Partnerships between government, private industry and academic institutions to train workers for required skills are especially important.  It is also rather important at this juncture for the Council to put more substance and specifics into the words, and not at six month increments.

The White House blog noted that the president indicated he was not satisfied with the pace of job creation in the United States and that is an obvious acknowledgement of national polls indicating an overall frustration with lack of U.S.  job growth.  While the U.S. manufacturing sector has been on a rebound, there is certainly more progress to be made.  More importantly we believe are more aggressive initiatives to build world-class supply chain networks for critical growth industries as well as needed investments in U.S. logistics infrastructure.

Later this year, the Jobs Council plans to deliver an American Jobs Plan to the President.  A statement from the Council cites three major areas to address structural deficiencies in the U.S. economy:

• Building the systems of competitiveness such as R&D investment, tax policy, visa reform and other required needs.
• Improving the tone and breaking down the silos between Americans about Business, Labor and Government, including listening and action sessions throughout the country.
• Bending the curve on unemployment which includes an emphasis on fast-growth companies and small businesses, along the need to address the competitiveness of America’s infrastructure.

We believe that the latter initiative which includes addressing infrastructure should be a focus of a concerted, bi-partisan effort to invest in world-class transportation and logistics infrastructure that improves the ability of U.S. manufactured goods to reach domestic and global markets in the most efficient and energy-sensitive manner.

Bob Ferrari

The first half of 2011 has been a very busy supply chain related conference season.  Conferences provide the opportunity for supply chain professionals to exchange views on common challenges of the day.

On the Infosys SCM blog, I penned a guest commentary that reflects on some of the common themes that have been brought forward in discussions and discourse.

Feel free to add your own thoughts and perspectives on current functional and business challenges.

Bob Ferrari

Note: Infosys is one of other paid sponsors of the Supply Chain Matters blog.

This is a follow-up to our previous Supply Chain Matters commentary regarding a severe foodborne outbreak of E.coli that has been impacting northern Germany and other countries, which has important supply chain implications. Thus far, the death toll resulting from this outbreak has risen to 31, with nearly 3100 sickened.

This deadly Escherichia coli outbreak appears to be an evolved strain which is extremely virulent and toxic, and has many global health agencies concerned. This strain has proven to be resistant to eight classes of antibiotic drugs.

Reports on Friday indicated that German health authorities concluded that the source of the outbreak was various sprouts grown and distributed from a small organic farm near the village of Bienenbuettel in Northern Germany. Authorities were able to trace the origin from specific interviews with patients affected, even though many did not recall what the specifically ate or what was included. A review of the food chain led to the restaurants visited, specific meals consumed, menus and recipes, and back through the various supply points of farm production.

According to an AP report featured in the San Jose Mercury News, the state assigned 1000 people to the case and inspectors visited more than 400 farms in Lower Saxony alone. Over 4600 microbiologic tests were conducted. Initial tests of the farm turned out negative but investigators began to dissect the various delivery records and health records of farm workers who also became ill from E.coli infections in early May, and that led to the more conclusive evidence. A account in the print addition of the Wall Street Journal also noted that authorities in the state of North Rhine-Westphalia managed to test a package of bean sprouts found in an infected family’s trash can, which tested positive on Friday morning.

Officials continue to warn that the crisis is not yet over, but that people should now avoid raw sprouts rather than previous alerts related to cucumbers, tomatoes or lettuce. The Bienenbuettel farm has been shut down but authorities are still concerned that there could be tainted sprouts remaining in food chains.

Conditions for growing spouts are also very ideal for the growth of E.coli bacteria.  Still not resolved, and somewhat troubling is that what caused the contamination at the farm is still not determined. It could be the water supply, growing facility or handling equipment among other sources. That remains an important objective for authorities to determine, although it could be a difficult task.

Meanwhile, impacted cucumber, tomato and lettuce farmers throughout the European Union are now demanding compensation for lost sales and destroyed produce, as Europe’s consumers avoided these products.

It may be weeks or months to come before this especially troubling E.coli infection incident is resolved, and European food chains will continue to bear some impact as consumers remain concerned as to the safety of certain agricultural products.

Bob Ferrari