The 22nd Annual State of Logistics Report, prepared for the Council of Supply Chain Management Professionals (CSCMP) was released this week (free for CSCMP members and can be purchased), and similar to the 2009 summary, the report provides interesting and perhaps troubling observations.

Let us begin with some of the summary highlights:

  • U.S. business logistics costs increased by an overall 10.4 percent in 2010 to $1.2 trillion.  This represented 8.3 percent of U.S. GDP compared to 7.8 percent of GDP in 2009. Both of the major cost components, inventory and transportation increased.
  • Industrial production was up 5.3 percent in 2010 after declining 11.2 percent in 2009, reflecting a bit of a comeback for U.S. manufacturing, but certainly not up to everyone’s expectations. Overall capacity utilization came in at 74.5 percent vs. 69.2 percent in 2009. The report further notes that there are signs the U.S. economy is stalling and predictions for a stronger showing in 2011 may fall short.
  • The average investment in all business inventories increased to near $2.1 trillion, an increase of $199 billion from 2009. There was evidence of inventory restocking in Q1 of 2010, a sell down in Q2, with inventory increases returning in the latter half of the year.  The key 2010 inventory-to-sales ratio ended the year at 1.25, just about even with the 1.27 ending experienced in 2009.
  • Freight volumes grew year over year, but at an unsteady pace with frequent spikes and valleys in monthly tonnage, carload, and intermodal and ocean container data.  This did not help with capacity planning

If you desire some contrasts to highlights from the 2009 data, you are welcomed to read our Supply Chain Matters commentary from last year’s report.

In terms of impressions and takeaways regarding the 2010 data, we certainly would point to the data reflecting the overall cost of carrying inventory as well as lingering structural changes within transportation infrastructure.

Inventory carrying costs primarily consist of financing, taxes, and depreciation, insurance and storage costs.  As we all know, interest costs are at an all-time low and the report notes that the annualized interest rate to finance inventories fell to .20 percent in 2010 from .26 percent in 2009. That amounted to a 15.9 percent drop in the interest component. The cost of warehousing fell 6 percent reflecting lots of excess available capacity. Insurance costs were also reported as flat. Taxes, obsolescence and depreciation however rose by 15.4 percent in 2010 reflecting what we believe are some problems on the financial side of the house.  Rather than CFO’s leaning on supply chain teams to take out more inventory, it may be time for financial teams to reexamine the means for accounting for inventories.

Another area to continue to watch is transportation costs, specifically what is happening within specific modes. Overall, transportation costs were reported as up 10.5 percent in 2010. Trucking, the largest component was up 9.3 percent with much of the increase attributed to fuel surcharges. Total trucking industry capacity has suffered during the recession with a reported 16 percent of truck capacity permanently removed since 2006. The trucking sector has also experienced the largest decrease in overall workforce.

Two other areas however reflect what we believe are disturbing trends. The cost of rail transportation soared 21.8 percent compared to last year’s 20 percent decline.  While volumes were up, rail car and equipment capacity remains underutilized with 316,271 cars, or 20.8 percent of the fleet remaining idle. Revenue per ton mile rose from 2.84 to 3.33 cents per ton-mile. This is disturbing because economics and sustainability efforts are steering more long-distance surface transportation toward intermodal rail and now is not the time for the railroads to make this option more efficient and economical, especially with excess capacity on the sidelines.  We highlighted in April how some rail carriers were unable to provide timely availability of railcars for major auto companies. Perhaps the Burlington Northern (BNSF) / Warren Buffet factor is a new perspective for the U.S. railroads.

Another troubling transportation area is water and ocean container transportation where costs were reported to rise by 14.1 percent.  It is no secret that that the entire industry suffers from overcapacity as ships ordered in pre-recession times continue to come on-line. Carriers however have been able to extract added fuel surcharges and rate increases via spot rates on popular routes while at the same time slowing down service and steaming rates to save fuel.  We previously penned our observations regarding this perplexing phenomena. Here again, many global shippers are incented by strategy to move more freight from air to ocean, and carriers have a short-term outlook on customer and volume growth.

Looking forward, the authors of the report predict a bumpy ride in 2011 with the U.S. economy potentially hitting a wall.  Overcapacity in rail and ocean and under capacity in trucking remain perplexing problems with industry self-interest the primary approach. The report authors again urges shippers to have a much stronger relationship with carriers and logistics providers and we tend to agree. While the rail sector is in the best position to take on more traffic, add more overall efficiency and help shippers reduce carbon and CO2 consumption, the industry seems anchored in short-term profit recovery vs. long-term strategy. As we noted last year at this time, the rail and ocean transport industry would be wise to help companies leverage on business recovery strategies along with improved and cost efficient services. Your capacity problem should not be that of your customer.

Bob Ferrari