Once again, as was the case last year, the state of U.S. Logistics remains troubling. The 23rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released last week (free for CSCMP members and can be purchased), and the report notes a continued trend for increased logistics and inventory costs.
Summary highlights included:
- The cost of the U.S. business logistics rose 6.6 percent in 2011 to $1.28 trillion, an increase of $79 billion from 2010. Logistics costs as a percent of nominal GDP rose 2.6 percent to a level of 8.5 percent.
- Both inventory carrying costs and transportation costs rose in 2011. Overall inventory levels continued to rise despite the advent of advanced inventory management practices and unprecedently low interest rates. Private business inventories climbed to 2008 recession highs, while the benchmark inventory to sales ratio was relatively flat for the year. Higher inventory led to increases in other carrying costs such as taxes, insurance depreciation and obsolescence, resulting in a 7.6 percent gain.
- Transportation costs were up 6.2 percent because of higher rates, while volume levels declined. The report notes that most U.S. Class 1 railroads and many of the major trucking companies reported significant profits and strong balance sheets. The trucking sector has successfully leveraged a capacity constrained environment. The railroad sector experienced a 15.3 percent increase, while third-party logistics providers gained 9 percent. That includes major carriers FedEx and UPS. Volume levels at U.S. ports improved only slightly, while ocean container shipping costs increased. A very positive side of the ports data is the positive volume growth of U.S. east coast ports which we believe reflects a resurgence in manufacturing related imports and the ongoing resurgence of the automotive sector.
- GDP growth rate of the U.S. economy slowed to 1.7 percent in 2011, roughly half from the 2.8 percent GDP level of 2010. On the positive side, U.S. exports of manufactured goods rose 15.1 percent, to $1.27 trillion. As many have noted, this trend has led to the current resurgence in U.S. manufacturing levels. On the not so positive side, an over 6 percent increase in logistics costs attributed to an over 50 percent decline in GDP output is not a healthy trend for the state of U.S. logistics infrastructure.
Overall takeaways from the 2011 report are obviously dependent on the reader frame-of-reference. If you reside anywhere in the transportation and 3PL logistics sector, the trend is obviously positive. Distribution center operators and real estate interests are included. If your frame of reference involves maintaining the current momentum and resurgence in U.S. manufacturing, than we submit there are troubling areas of concern regarding current trends.
The report itself benchmarks logistics costs to a pre-recession level of 9.9 percent of GDP in 2007, the termed precipice of logistics activity. The reality however, in our view, is a U.S. logistics system more focused on achieving carrier profitability vs. increased productivities and efficiencies. With a U.S. economy showing some promising signs of manufacturing renewal, logistics infrastructure costs and capacity issues have to be addressed in order to regain world-class competitiveness. Procurement teams will also have to be prepared for more potential increases, depending on economic events in the coming months.
Higher business inventories are also an obvious concern. As noted earlier, the report states that U.S. inventory levels are close to the levels experienced at the height of the recession, ending the year at the highest point since Q3 of 2008. Most interesting is that retailers have leaned out inventory levels while wholesale and manufacturing inventories have experienced the most increase. The report attributes the increase to stockpiles rising toward retailers pushing inventory up the chain and a period of resurgence that came at the end of year. Our Supply Chain Matters view is that there are more fundamental issues occurring and we plan to delve into the numbers in a later analysis. Technology has clearly facilitated more advanced inventory practices as witnessed by the ability of U.S. manufacturers to quickly adjust to the severe drop in business that occurred in 2008-2009. Our commentary of the 20th Annual Report reflecting on 2008 included an observation that inventory management will remain a significant challenge for months to come. That was 2008, and here we are in 2012. Since that time, the reality of major supply chain disruptions has impacted global supply chains and a revolution surrounding online buying practices is underway. The open question is the effects on current inventory management practices, and we will certainly dig further.
In the meantime we encourage our readers to share their observations regarding the current state of U.S. logistics, its implication toward a resurgence of U.S. manufacturing capabilities, and particularly, the current state of overall inventory management.
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