The Council of Supply Chain Management Professionals (CSCMP) released its 21st Annual State of Logistics Report on June 9th with the sub-title The Great Freight Recession. That is  an appropriate title since many of the messages brought out in this well anticipated annual report point to 2009 as a year of dramatic transport capacity decreases and a sobering message that there will be difficulty in ramping-up some U.S. transport capacity  in 2010. Overall, the report identified that U.S. logistics costs declined 18.2 percent in 2009, the largest drop since this report series began, Logistics costs, as a percent of nominal GDP, hit a historic low of 7.7 percent. The bottom line:  Supply chain logistics and transportation professionals under pressures to reduce costs in 2009 had the opportunity to take advantage of massive structural changes in reduced transport activity and consequent surpluses in capacity.  The report is available free of charge to CSCMP members at the following web link, or can be purchased.

Since its inception, Supply Chain Matters has provided three key takeaways from each highly anticipated annual report.  For last year’s (20th Annual) report, we noted the top three as:

  • Inventory management remained as a significant challenge for months to come.
  • The beginning of structural change (within U.S. logistics and transportation infrastructure) accelerated.
  • The need for having contingency plans addressing the potential for disruption in carrier capacity was ever more critical.

Upon reviewing the latest report, we walked away with the following three messages relating to the business logistics systems in 2009:

Contrary to 2008, the key inventory-to-sales ratio returned to a reasonable level, but the resulting actions brought whiplash to the overall system.  The report noted that “businesses cleared inventory at a rate not seen for thirty years, but were unable to keep ahead of the (precipitous) drop in sales.  Both manufacturers and retailers were reluctant to order new goods and materials until late in 2009, when warehouses and distribution centers were very low of stock.” As we have noted in our predictions and ongoing commentary, sudden unexpected ramp-ups in sales levels have now run into this structural problem.  While certain carriers such as air freight can more easily bring on former idled capacity, others such as surface trucking and ocean container are experiencing difficulty.

The structural changes of 2008 continued into 2009 with long lasting effect, even in the months to come.  Surface trucking, the largest component of the transportation sector, dropped 20.3 percent on a volume basis in 2009, with another 2000 trucking companies going out of business in 2009.  Once more, the report predicted that yet another 2000 firms will fail in 2010.  More sobering was the statement that many shippers abandoned long standing relationships with carriers in favor of spot-market rates. Rail carload traffic was down 16.1 percent and the Association of American Railroads estimated that the rail industry had $43 billion tied-up in idle assets. Over 500,000 rail cars and several thousand locomotives were placed in idle storage in 2009, but the report notes that the railroad industry can readily ramp-up idle capacity if demand returns to a sustainable level.  Likewise, ocean container and shipping also was hit hard with roughly one quarter of the world’s fleet laid up at some point during 2009, but artificial means to constrain capacity was being utilized to sustain freight rates.  Last week, a Financial Times article noted that soaring growth in Asia-Pacific export traffic is leading to a severe shortage and imbalance in the availability of ocean containers to support such shipments. (free sign-up preview account required) The issue was even more compounded by the delivery of new ships ordered years before. Routes have been curtailed and shipping times have been lengthened as ocean carriers attempt to save on operational and fuel costs.  We all suspected that transportation was hit hard in 2009, but the statistics added a more sobering impact.

On a slightly brighter note, the cost of carrying inventory fell .26 percent in 2009 as interest rates remained at rock bottom. Taxes, obsolescence, depreciation and insurance were down 6 percent and the cost of warehousing fell 2 percent, the first decline in over three years.  CFO’s can no longer adhere to a belief that the cost of carrying inventory is expensive since the numbers reflected otherwise.  In fact, astute safety stock planning may be advisable at this point.

The report concluded with some timely advice. Transportation carriers who survived the debacle of 2009 in a serious weakened state would be wise to capitalize on business recovery opportunities and improved services to shippers.  Shippers themselves should note that as capacity tightens even more, rates are going to rise.  “Shippers would be wise to be first at the table in negotiating rates and capacity-guarantee a minimum level of business in return for guaranteed carriage of limited rate hikes two or three years out.”

Translation in clearer language: It is time to hug your most favored carriers before a new suitor comes along.

Bob Ferrari