Logistics Costs : A grim picture

July 17, 2006 by SwizStick  
Filed under 3PL, Contract Logistics, Education, Misc Logistics, Seafreight, Supply Chain Management

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The latest report on logistics costs from this month’s issue of Logistics Management paints a grim picture of the many challenges facing the U.S. logistics industry:

In fact, estimated logistics costs in 2005 totaled a whopping $1.183 trillion, an increase of $156 billion over 2004 and the largest year-on-year change in the 17-year history of the report. Shippers are feeling pressure from two directions.

One factor is the steady climb in interest rates, which has pushed up inventory-carrying costs. But the biggest cost driver has been rising transportation expenses, which reached $744 billion in 2005, up from $636 billion in 2004. Soaring fuel prices, a driver shortage, and diminished competition have all come together to raise rates across all modes, and for trucking in particular.

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In 2001, logistics costs fell to 9.5 percent and reached a low of 8.6 percent in 2003. That decline was due in part to historically low interest rates that resulted from the Federal Reserve Board’s attempts to stimulate the economy out of a recession.

A weak economy signals less demand for transportation services. Now that the U.S. economy is booming, demand is exploding. The days of cheap money appear to be behind us: The Federal Reserve Board has begun ratcheting up interest rates in an effort to hold back inflation caused by higher energy costs. These higher borrowing costs have been especially troublesome because they coincide with a recent trend toward building up inventory.

All emphasis ours.

One of the reasons for the recent trend in building up inventory is the realization that just-in-time / lean inventory systems are exceedingly susceptible to deviations and problems in the ever larger global supply chain. As companies have rushed to source components and products from lower cost countries, usually in China, supply chains have become incredibly long and complex. In addition, the rapid rise of international trade and influx of imports is taxing the country’s infrastructure:

The nation’s harbors in particular are in dire straits. Wilson points out that an estimated 800 oceangoing ships make more than 22,000 calls at the nation’s 145 ports each year. Even if those ports could manage to handle the growth in container loadings and discharges, they still would suffer from congested truck and rail access to their docks. The situation will only get worse, she predicts, as ocean carriers deploy larger vessels carrying many thousands of containers. The new ships’ size, moreover, will force ports to widen their navigation channels and deepen shallow harbors.

Congestion also plagues the nation’s highways, and that situation, too, is expected to worsen in the years ahead. The Federal Highway Administration predicts that the volume of freight traffic on U.S. roads will increase 70 percent by 2020. Just to maintain the current highway infrastructure, the agency has said, the United States will have to spend nearly $76 billion annually through 2020.

To avoid potentially disastrous bottlenecks and solve the congestion problem, Wilson contends, the country must adopt a “total system” approach that looks at the connections between all modes. “Investment decisions should be made to maximize the benefits of improvements that will reduce the bottlenecks and the freight exchange points throughout the system in the next three years,” she argues.

The issue of cargo security poses another problem that could drive up logistics costs. In 2005, more than 11 million containers were imported into the United States. By 2007, an estimated 13 million containers will be entering the country annually. Any disruption to this container flow would have immediate and wide-ranging economic implications, Wilson notes.

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Problems caused by the nation’s aging infrastructure and the need to improve cargo security will only add to the growing pressure on logistics costs. Add to that inevitably higher interest rates, rising fuel prices, and escalating wages, and there’s no question that logistics costs as a percentage of GDP are headed up—and over—the 10 percent mark. “It’s not a matter of if anymore,” Wilson says about crossing that threshold, “but a matter of when.”

I strongly recommend reading the entire article here. It touches on a number of issues that continually come up in this blog : the effect of increasingly large vessels on container pricing and port infrastructure, how congestion and infrastructure problems both in the U.S. and abroad effect pricing and the future of logistics, and why companies shouldn’t blindly move production or sourcing overseas – sometimes it’s best to stay close to home. While it’s mostly gloom and doom, companies with a focused attention to their supply chains with careful analysis and planning of every facet should be able to weather the storm.

Ocean container line earnings: Not a pretty picture

IATA paints gloomy picture for air cargo

TSA (Transpacific Stabilization Agreement) warns of capacity restrictions in 2009

Congestion Costs