If your email address is listed on supply chain media distribution, your inbox is probably loaded with headline stories outlining the highlights of the 20th Annual State of Logistics Report, which was just released by the Council of Supply Chain Management Professionals (CSCMP).  This report is issued annually in June with much anticipation among the logistics and transportation communities. The main headline for this year’s report was that U.S. logistics costs dropped for the first time in over six years, reflecting a decrease of $49 billion from 2007.  There were however more important data points that our community should reflect upon.

If you are a member of CSCMP, you have free access to the report.  When I viewed the report, I noticed that this year, there seems to be no means to download the entire report.  Instead, you have to read it in an Adobe viewer, or print individual pages. No doubt this must have been an attempt to exhibit a green strategy with the opposite effect. But I digress.

The purpose of blogs such as Supply Chain Matters is not to re-hash news stories but to provide commentary, insight and discussion.  In this first post, I’m going to focus on the overall takeaways that I garnered after a summary reading.  In Part Two, I’ll focus some comments of specific data points of significance.

When I commented on last year’s 19th Annual Report, I summarized my three key takeaways within the 2007 report as:

  • Increased globalization led to quantified evidence of increased logistics and inventory costs.
  • As a result of unprecedented rises in the cost of energy and other factors, the U.S. logistics system was beginning to experience structural changes.
  • Despite a ten year record of significant progress, there were clear signs that more difficult challenges lie ahead for the supply chain community.

What a difference a year can make, a year that brought continuous turbulence and challenge on all fronts. To recall just a few, there were a couple of major hurricanes, oil peaking near $150 and the global financial crisis that evaporated product demand in key industries and resulted in what I termed the “great 2009 inventory backflush.” Within the latest 2009 report, I found another three takeaways:

  1. Inventory management will remain a significant challenge for months to come.  While 2007 provided evidence of noteworthy increased logistics and inventory costs driven by globalization and outsourcing, 2008 presented significant industry challenges in dramatically decreased purchasing activity, higher inventories, and lower volumes shipped.  On the surface the various metrics of flat transportation and significantly reduced inventory carrying costs are noteworthy, but not in any way a motivation to feel confident.  I believe the biggest challenges are yet to come. The inventory-to-sales ratio skyrocketed in late 2008 to levels of eight years ago, which should be a cause for additional concern. While inventory carrying costs significantly fell by 13 percent, primarily as a result of far lower interest rates, the unprecedented low interest rates we have experienced through the first part of 2009 will only last so long.  The effects of massive governmental stimulus plans are bound to take their toll on interest rates and taxes, and again drive-up inventory costs.
  2. The beginnings of structural change that was noted in 2007, accelerated in 2008. The report author, Rosalyn Wilson noted that “she had seen an estimate that shippers are moving 25 percent to 30 percent less freight nationwide, and there is no incentive to keep fleet capacity.” Idled ships and barges are being utilized to store idle inventory instead of transport. Overall air freight volumes were significantly down by 9.8 percent.  In ocean containers, the report notes: “The west coast ports, and particularly LA/Long-Beach, are seeing what may actually be a permanent reduction in traffic levels.”  In the midst of these imbalances, the U.S. railroad sector garnered a 10.5 percent increase in revenues despite volumes being down 3 percent.  An article featured in Logistics Management best describes the pending challenge.  While shippers may be in the catbird seat for transportation services this year, you had best nurture a closer relationship with your preferred carriers, because that will change dramatically when the recovery takes hold.  As the saying goes, when times are tough, you always remember those who provided the helping hand vs. those take took maximum advantage.
  3. Regardless of your company size, the need for having contingency plans addressing the potential for disruption in your network of suppliers, carriers, and partners is even more critical than it was a mere year ago.  The report wisely recommends that organizations take the time now to review existing agreements and plans, as well as lock in carrier needs. As I stated many times before, every organization will need some basis of a supply chain risk strategy.

Ms. Wilson noted that the most important advice she can give is to be proactive in areas of supply chain partnerships, increased productivity, and new technology.  Wise words indeed!

One final thought for readers to ponder.  The past era of global outsourcing of suppliers and production among U.S. based organizations was primarily motivated by a compelling lower cost dynamic. The 2009 version of the state of logistics provides more compelling evidence that conditions are changing for cost.  Do your homework and seek advice.

Bob Ferrari