In my Part One posting, I provided commentary relative to the recently released 20th Annual State of U.S. Logistics Report. I shared what I believed were the three important takeaways from this year’s report, over and above the usual media headlines.
With two non-stop days of rain over the weekend, it was a great opportunity to dive more into the details of the report for more information nuggets. In this posting, I’m going to comment on additional trends that I found to be noteworthy for further discussion and thought.
One area that really caught my eye was the increasing rise in warehousing costs. The report indicates that warehouse costs rose 9.5 percent in 2008. This was incremental to the 9.9 percent increase reported in the 2007 report, and amounts to a cumulative 19.4 percent increase over the past two years. That is significant. The report cites the cause of these increases as additional value-added services such as kitting, assembly, label printing and other services. While I can understand and acknowledge fulfillment process postponement needs in shifting more services to warehouses, this level of increase doesn’t seem to make sense unless it is significantly offsetting other production related costs. I would like to call on my distribution and operations management readers to share their impressions of what’s really happening with this trend. Should this be an area of ongoing concern? I myself suspect that it may be, since so many of these services are provided by third-party logistics entities under the guise of cost savings.
One cannot comment on warehousing without also mentioning inventory. As mentioned in Part One, in spite of dramatic and swift actions to decrease inventory, the inventory to sales ratio remains high. The increases have occurred across all channels, wholesale, manufacturing and retail. This needs to be an area of continued concentration by Sales and Operations Planning (S&OP) and supply chain planning teams in the coming months. Technology will no doubt play a continued role in facilitating more advanced analysis and management techniques.
Another noteworthy trend was in the area of ocean container movement, and specifically two trends. The first is a continued existence of over capacity, and the second is the fact that there was a noted reduction in market share traffic to the west coast ports of Long Beach and Los Angeles. The report bluntly states that: “the ports of LA/Long Beach are experiencing what may actually be a permanent reduction in traffic levels.” The loss is attributed to other west coast ports making significant improvements in their infrastructure, but more troubling, the higher costs being imposed to shippers for environmental programs at these specific ports. I shared some commentary in March about the Clean Trucks Program and attempts by the ports of LA/Long Beach to shift fees to truckers as an incentive for cleaner trucks. There is obviously some factors of economics that must still be played out in the quest for sustainability strategies. The report also acknowledges the state of overall overcapacity, and predicts that the industry will probably not right itself until 2014 or 2015. That implies that we may continue to see different means for managing or dealing with idle ships, and further reinforces the reality that ocean container shippers will continue to have a bargaining advantage.
Looking ahead, report author and economist Rosalyn Wilson predicts an upcoming period of stabilization rather than recovery. She describes a U shaped cycle where the bottoms currently being experienced may linger for some time. Her prediction is that U.S. logistics activity will not returning to pre-recession volumes until late 2010. She also points to permanent structural change in consumer buying behaviors, brought on by continued declines in U.S. household wealth. As I stated in my posting on pending structural change in supply chain, recovery in supply chain activity will occur quicker in the developing regions of the BRIC countries, as opposed to any U.S. led recovery.
Finally, regarding action planning over the coming months, Ms. Wilson cites the most important advice as staying proactive vs. reactive. “Analyze your supply chains, re-examine your supply chain partners and the risks associated with them, increase productivity, and add new technology…. Re-evaluate your relationships with your supply chain partners and strengthen them.”
Very good advice for all.
What’s your reaction? Have you briefed your senior management regarding the implications of current state of U.S. Logistics/