In my part one post, I provided comments and observations regarding the recent release of management consulting firm PRTM’s release of its Sixth Annual Global Supply Chain Trends 2008-2010 report, which highlighted responses from 300 international participants on the current perceptions of the effects of today’s globalization strategies on current and near future supply chain business strategies.
In this post, I will add comments and observations related to the release of the 19th Annual State of Logistics Report sponsored by Council of Supply Chain Management Professionals (CSCMP) (free to CSCMP members; cost for non-members) which was released on June 18th.
My three most significant takeaways from this annual report card are:
- As expected, increased globalization has led to quantified evidence of increased logistics and inventory costs. While investments in business process and technology continue to help in managing overall business agility and efficiency, economic trends and uncertain global forces again threaten to unravel these gains.
- As a result of unprecedented changes in the cost of energy and other economic factors, the U.S. has begun to experience structural change in overall logistical capacity, the effects of which are yet to play out.
- That despite a ten year track record of significant progress, difficult challenges lie ahead for the collective supply chain community, as well as industry and government.
Let’s briefly review some key evidence brought out in this report. During 2007, the overall cost of U.S. logistics increased $91 billion to $1.4 trillion, or the equivalent of 10.1 percent of GDP. As a reference point, the U.S. economy only grew by 2.2 percent in 2007. This was the first time since 2000 that overall logistics costs surpassed ten percent, and almost half-way into 2008, indicators point to overall logistics costs claiming a bigger portion of GDP.
While transportation costs rose to 6 percent, the data also reflects that inventory costs are now a growing problem. Inventory carrying costs accounted for 44 percent of the overall increase in 2007 global logistics costs, with an 8.7 percent overall rise in inventories. Growth in wholesale inventories has outstripped that in retail, which in my observation reflects that inventory remains further up the supply chain. Report author, Rosalyn Wilson, in her commentary to the National Press Club, indicated “that the bad news for inventory levels in 2007 is that turnover rates are falling.” She further indicated that while the traditional inventory-to-sales ratio has declined for the past ten years to the level of 1.27 at the end of 2007, these inventory turnover rates had begun to fall in the final quarter of 2007, with much of the recent increase attributed to changes in the way companies can respond to unsold inventories within an extended global network. According to Ms. Wilson, “The significant order lead times required when sourcing off shore have led to a less nimble system that cannot make adjustments immediately”
Regarding structural changes in U.S. logistics infrastructure, two noteworthy points of commentary were included in the report. Close to 2000 U.S. trucking firms failed in 2007, with an additional 935 reported in the first quarter of 2008. The average fleet size of failures was 45 trucks, and the data did not reflect operators of less than 5 vehicles, which implies a bigger number of removed capacity. While continued overall weak demand has resulted in abundant current capacity, a more concerning trend is that unlike previous cycles when idled trucks remained in inventory to await an economic turnaround, trucks are instead being sold at attractive prices to non-U.S. countries. The U.S. Commerce Department reports that nearly 24,000 used over-the-highway tractors have already been exported since last year, three times that of 2006. As I see it, in essence Ms. Wilson raises the question of what happens when the U.S. economy is ready for a comeback but the trucks to support the required logistics infrastructure have been sold to other countries. There is further commentary regarding the enormous cost of needed investment in the broader U.S. highway and bridge infrastructure as well.
The overall cost of warehousing also rose 9.9 percent in 2007. This provides evidence of the move to more regionalized U.S. distribution, no doubt a response to the need to offset rising transportation costs as well as mitigate strategies in overall carbon emissions.
The bottom line evidenced by both of these reports is that change is occurring at an unprecedented rate, and that supply chain managers will need to continue to respond to extremely difficult business challenges involving international markets, the effects of globalization in serving these markets, and a highly inflationary cost environment. Having broader skills and insights for monitoring the bigger-picture, ensuring a faster virtual response to rapidly changing conditions, and the ability to still deliver on the bottom line will all come to the forefront.
Supply chain will no doubt be a C-Suite and board room agenda item for some time to come, so be prepared!