the shaky state of logistics

It may not be time to dial up the bomb squad just yet, but the logistics profession might want to keep that phone number handy.

As robust as the business logistics sector may appear right now, the profession is sitting on a figurative ticking bomb, warned Rosalyn Wilson when she presented the annual State of Logistics Report in Washington, D.C., in June. Though freight volumes continue to surge, she cautioned, there are unmistakable signs of trouble ahead: a looming crisis in transportation capacity, infrastructure problems, the heightened risks of terrorism and natural disaster, and the lack of effective advocacy on Capitol Hill.

By the numbers
Now in its 17th year, the annual State of Logistics Report, which is sponsored by the Council of Supply Chain Management Professionals, provides an accounting of the nation's total logistics bill and tracks trends in transportation costs, inventory-carrying costs and total logistics costs. And last year, those costs moved in just one direction: up. Collectively, business logistics costs climbed to record levels last year, topping $1.18 trillion. "This represents an increase of $156 billion over 2004, almost double last year's rise, and the largest year-to-year change we've seen since we launched this annual report," reported Wilson, who is the author of the study."

That $156 billion increase in logistics spending translates to a growth rate of 15.2 percent, a rate that easily outpaced the overall economy's growth. "The U.S. economy slowed slightly from last year's (2004) pace," noted Wilson, "while the growth in its business logistics system was unparalleled." As a result, logistics-related expenditures rose as a percentage of the nation's gross domestic product (GDP). To be precise, logistics costs swelled to 9.5 percent of GDP in 2005 from 8.8 percent in 2004.

Wilson, who had predicted last year that logistics costs would reach 10 percent of the GDP in 2005, acknowledged that her forecast was a bit off. But she said she was confident that they'd meet or exceed that threshold this year. "Given soaring fuel costs, continued capacity pressures, record levels of truck driver shortages and turnover, and the expected costs of meeting new security requirements, logistics costs have continued to rise in the first two quarters of 2006," she said. "With interest rates on the rise, and indications from the Federal Reserve that they have not yet peaked, the economy can be expected to slow somewhat." As she sees it, it's virtually certain that in 2006, the percentage will return to the double digits typical of the '80s and '90s (see graph for a look at the trends).

Sounding the alarm
After running through the numbers, Wilson turned her attention to the future, outlining the challenges the profession faces in the next decade. She began with the nation's deteriorating transportation infrastructure. "The physical transport network—the roads, rail lines, ports, airports, freight yards, etc.—is the backbone of our nation's freight system and economy," she said. "Its continued health, or lack thereof, will determine our position in the global economy—and we are losing ground."

Part of the problem is a lack of investment, she noted. State and federal funding has fallen far short of the levels needed to maintain the existing infrastructure, never mind expanding it to accommodate population, economic and freight volume growth. "We face capacity constraints at virtually all major freight gateways and congestion and bottlenecks throughout the systems," she said. As for the infrastructure's condition, she noted that when the American Society of Civil Engineers recently issued a "report card" on the nation's transportation infrastructure, the grade was a D+. "If we do not respond with immediate and long-term investment ... we will begin to experience regular failures in the system."

Another threat to supply chains is the heightened risk of terrorist- and weather-related disasters worldwide, she continued. "More disruptions are occurring, and [they] are having a more significant impact," she said. The globalization of our economy has only heightened the risk. Nowadays, a natural disaster anywhere in the world, not just in the United States, can have a profound and negative impact on a company's supply chain. "With each piece of the global transportation network increasingly tied to every other part," she said, "the cascading impacts from adverse events can now extend further than ever before."

Wilson concluded by calling for strong, unified national leadership to address the infrastructure and security issues. And there's no time to lose, she said. The clock is ticking.