Logistics spending in the U.S. dropped over the last year, the first decrease in six years. Long-term trends point to leaner supply chains fighting potential shortages and probably higher cost pressures.
According to the annual State of Logistics report, which analyzes the status of the U.S. logistics industry, business logistics costs fell by $49 billion last year. Despite this reduction, last year was still the second highest on record for spending on business logistics.
Published annually by the Council of Supply Chain Management Professionals (CSCMP), the report provides a snapshot of the current state of the overall U.S. supply chain.
Rosalyn Wilson, a researcher and logistics consultant, developed the report for CSCMP. She identified a number of key trends that may impact pallet users and their packaging suppliers.
The following is a brief synopsis of the significant trends that I found from her presentation and the subsequent discussion by a panel of supply chain executives who talked about the report.
• Abundant transportation capacity, especially in trucking and ocean shipping, led to downward pressure on rates, frequently below costs. This has forced many transportation firms out of business, and others are barely staying in business. Significant contraction, especially in trucking, could have a significant impact on shipping once the global economy rebounds. While there may be too much capacity now, there likely won’t be enough in the future, so you should treat your transportation partners well if you want service in the future.
• Wilson reported that logistics costs fell in 2008 after rising over 50% in the last five years. Inventory carrying costs plunged in 2008 primarily because interest rates were over 50% lower than in 2007. This combined with almost flat transportation costs to push logistics as a percent of GDP below 10%.
• Business inventories rose for the first half of 2008 and dropped in the second half of the year as companies adjusted for receding demand. Wilson wrote, “Businesses are clearing out inventories at a rate not seen for thirty years. In addition, manufacturers and retailers curtailed ordering in 2008 in anticipation of continued slow sales.” Despite cutbacks in production, inventory to sales ratios continued to skyrocket toward the end of 2008. Wilson explained, “Retailers and manufacturers are finding it difficult to draw down their inventories to match sales and that trend will be a persistent problem well into 2009.”
• Aware of the changing dynamics, major companies are redefining supply chains and processes to become more efficient. This means even more pressure on Just-in-Time inventory in the future. Retailers have been reducing the amount of inventory they are carrying at stores and DCs, which is going to continue to push inventory storage further up the supply chain to manufacturers.
• Wilson pointed out that most American families will have far less money to spend than in the past. U.S. household wealth fell $4.9 trillion in the fourth quarter of 2008, the largest drop on record. Wilson expects the trend toward frugality “will become more ingrained and consumers will be less willing to extend their credit as before.” If this indeed occurs, consumer spending may not recover to previous levels for quite a while.
• Consumers are buying in cycles, spending more when they get paid and cutting back as the money runs out before the next paycheck. Wilson reported that retail sales were dropping significantly toward the end of each month.
• The CSCMP report foresees a long recovery although the worst may be over. Wilson commented, “The economy is no longer plummeting downward, but it has not yet really started its upward climb. We have probably not bottomed out yet in a number of areas – most notably unemployment.” Wilson believes the recovery will take a long U-shape and that we are just getting to the bottom of the first part of that U-shaped recovery. Wilson anticipates the U.S. economy won’t return to pre-recession levels until probably late 2010.
• The lone bright spot in logistics was third-party logistics (3PL). Revenue for forwarders and other 3PLs was up almost 6.7% last year. Wilson wrote, “This sector is weathering the economic downturn better than asset based companies are. 3PLs have been buying transportation on the spot market and making deals with the abundant capacity. They benefit from not having to worry about capacity utilization.”
• Although GDP declined in 2008, logistics costs shrank even more. Logistics costs had outpaced GDP growth over the last four years, but the unprecedented drop in interest rates pushed logistics costs down, reversing that trend.
• Warehouse costs rose 9.5% last year. Warehouse managers report that inventory turns are down substantially as stocks spend more time in storage, which equates to fewer pallets being ordered. Warehouses have focused on value-added services to increase revenue given the sharp drop in volume. This includes services such as label printing, kitting, assembly, and shrink wrapping. Any service or technology that you can offer to reduce transportation or storage costs or optimize a network is in demand.
• The somewhat good news is that transportation costs were kept in check. Transportation costs rose less than 2% in 2008 compared to 6% the previous year. Fuel surcharges, which had been a major driver of higher costs in the past, declined significantly. The problem is that lower transportation volumes are causing many trucking companies to go out of business. Wilson estimated that shippers are moving 25-30% less freight nationwide today compared to a year ago. This could put a real strain on truck capacity when the economy starts to rebound. The departure of trucking businesses could create opportunities for pallet companies that have excess trucking capacity.
• Problems are not isolated to the United States. Globally, there is overcapacity in the ocean freight sector. Activity at Asian ports was down 18% in February. Wilson pointed out that a recovery in Asian ports will be the first sign of a rebound in the global shipping industry.
• The stimulus bill requested by President Obama does little to deal with the long-term logistical challenges facing the country. Only about $45 billion of the stimulus package is allocated for transportation. That equates to doubling federal spending on transportation for a year. In reality, the stimulus bill won’t build new highways or light-rail lines to relieve congestion.
• The CSCMP report suggested a number of proactive steps to ensure that companies are ready for the challenges that will occur when the economy rebounds. Current overcapacity and price reductions are the lull before the paradigm shift. Wilson suggested locking in freight capacity with guarantees before it becomes scarce. She said that shippers should look more at the use of intermodal transportation and divert truck movements to rail and inland waterways. She warned that companies should be reassessing suppliers to determine the risk of failure or disruption.
For more information on the CSCMP Annual State of Logistics Report, visit https://cscmp.org/cscmpstore.
