The 24rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released earlier this week (free for CSCMP members and can be purchased for $295, both options available on the CSCMP web site). This report has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics and transportation professionals. The current report that tracks 2012 activity notes a continued trend for increased logistics, transportation and inventory costs. In our view, this should be of concern to manufacturers and retailers and their associated supply chain and product management teams, especially since these trends continue to manifest in 2013. Similar observations were noted by Supply Chain Matters concerning last year’s annual report.
The report authors and some business media have positioned the primary takeaway headline for this year’s report with statements that overall logistics costs are growing at about the same rate as U.S. GDP. We caution our readers to not be lulled by that takeaway, since by our analysis, the numbers reveal rather troubling implications that warrant additional management attention. Long-time report author, Roaalyn Wilson poses a question to readers: “Is This the New Normal?” We certainly do not hope that this is the case.
Highlights and some observations of the latest report numbers are noted below.
The cost of the U.S. business logistics rose 3.4 percent in 2012 to $1.33 trillion, an increase of $43 billion from 2011. Logistics costs as a percent of nominal GDP were reported to be 8.5 percent, roughly the same as in 2011. This and last year’s report stress that the overall U.S. economy continues to exhibit lackluster GDP growth. From 2009, the previous low point of U.S. economic recession, to 2012, GDP grew by roughly 12.5 percent during the three year period. However, the cumulative total of logistics costs increases from 2009 to 2012 increased by roughly 21 percent, reflecting an overall increase of $230 billion. That should be a cause of definite concern for the supply chain management community, since logistics costs over these past three years have increased at twice the rate of GDP growth. The report includes a chart that tracks U.S. business logistics costs from 2003 to 2012. The visual of that chart makes clear that U.S. logistics costs have now reached levels incurred in 2008, and if the trends continue, could surpass the peak year of 2009. With a lackluster U.S. economy, that is not a healthy trend.
As was the case in 2011, both inventory carrying and transportation costs rose in 2012. Overall inventory levels continued to rise despite the advent of advanced inventory management practices and historically low interest rates. Inventory carrying cost rose 4.0 percent in 2012 while business inventories rose in all three out of four quarters, ending the year at 3.9 percent higher than in 2011. Once more, retail, wholesale and manufacturing subcategories of inventory all climbed during the year. According to the report authors, higher inventories combined with historically low interest rates led to a 6.9 percent decline in the interest component of carrying costs, and with normal interest rate conditions, the change would have been in the other direction. The culprit to increased carrying costs, by our view, is reflected by a 7.6 percent increase in the cost of warehousing in 2012. If you combine the reported 7.6 percent increase in carrying cost reflected in 2011, with the 4.0 reported for 2012, there has been a two-year increase of 11.6 percent. That is far higher than any interest rate increase, and should be another area of concern, especially if money interest rates begin to rise. The report author concludes that inventory management has made great strides in the last year. Supply Chain Matters respectfully disagrees and cautions supply chain and business executives to not be lulled. While major supply chain disruption events and increased risks have been clearly on the increase, it should not be a cause for aggregate inventory increases. We have more sophisticated inventory planning and management tools available, which leaves an open question on management practices and effective use of these tools.
Transportation costs were reported as up 3.2 percent in 2012. That is on top of the 6.2 percent reported in 2011. Report author Wilson concludes that the lower rate of increase in 2012 was because of weak and inconsistent shipment volumes and strong pressure to hold rates. In the report, she points to the same structural trends affecting global transportation that we at Supply Chain Matters have raised in a number of commentaries throughout the year. Ocean container capacity jumped by over 7 percent as shipment demand fell sharply, resulting in 7 unsuccessful attempts by carriers to increase rates during 2012. Air freight revenues increased by 3.1 percent but total tonnage declined over 2 percent. The report acknowledges chronic overcapacity and deteriorating yields in the air freight sector. The report quotes an Armstrong and Associates source indicating that freight forwarder costs, representing non-asset based freight service providers and 3PL’s, rose by 5.4 percent. On the positive side, the cost of rail transportation increased by only 4.9 percent vs. the 15.3 increase reported in 2011.
Supply Chain Matters submits that the overall takeaways from the 2012 State of Logistics are once again dependent on the reader frame-of-reference. If you reside anywhere in the transportation and 3PL logistics sector, your reaction may be positive. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding delivery of services. Distribution center operators and real estate interests are included. If your frame of reference involves a constant diligence for controlling overall transportation procurement and supply chain related operating costs, we again submit there are troubling areas that should motivate concern and attention. In one year alone, the imbalance of forces affecting global and domestic transportation have magnified, making the long-term contracting for transportation services a difficult and fluid effort.
Procurement, supply chain planning, B2B and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in consistency of service, deeper levels of business process collaboration delivered at a competitive cost. Procurement teams approaching transportation spend in the singular dimension of cost reduction is also not wise, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes.
Similarly, S&OP teams must re-concentrate efforts to manage overall inventories with a keener eye on the overall stocking point trade-offs and costs of carrying inventory. With more sophisticated tools available to manage and optimize end-to-end supply chain inventories, the open question may be in the quality of the data that is fed into these tools, especially the realities of increased carrying costs. Teams are not fooling anyone by allowing data to remain static. Today’s global logistics environment is not static, but rather highly dynamic and complex. Decision-making data must reflect this state.
We again re-iterate a point made from our commentary regarding last year’s report. Benchmarking logistics costs to a pre-recession level of 9.9 percent of GDP in 2007, the termed precipice of logistics activity is defeating for manufacturers and retailers. It is a benchmark more appealing to logistics and transportation providers. We suggest that the most important report aide for manufacturers and retailers be the current chart (noted as slide 7) that tracks logistics costs as a percentage of GDP by major geographic region. The report authors should consider expanding this chart to report the trending of major geographic business costs by region, by year, from 2008, the start of the global economic recession.
The U.S. economy continues to show promising signs of manufacturing renewal and now, export recovery. All of this is dependent on a business logistics infrastructure that demonstrates world-class competitiveness. If there is a clear learning from the past three to four years, it has been on reality that supply chains exist and are now dependent on a global network of business logistics. The major decisions related to supplier and product manufacturing sourcing is now more vested in the tradeoffs of global logistics and transportation costs.
We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication toward shifts in global sourcing, and implication on current operations planning and procurement management processes.
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