With rail and truck rates soaring, fuel prices skyrocketing and port congestion creating costly delays, nobody would be surprised to learn that the nation's freight bill rose sharply in 2004. And so the news that total U.S. business logistics costs soared by $71 billion to $1.015 trillion last year (a 7.1-percent increase over 2003) hardly raised an eyebrow when the nation got its first look at its 2004 annual logistics bill in late June.What did excite comment was evidence that despite the mounting costs, logistics professionals managed to wrest enormous productivity improvements from their operations. In a finding that surprised nearly everyone in the business, including the veteran researcher who crunched the numbers, the study indicated that against the odds, the nation's logistics system operated at the same level of efficiency as it did in 2003.
Rosalyn Wilson, who released the 16th annual "State of Logistics Report" at a press conference in Washington, D.C., reported that total logistics costs in 2004 held steady at 8.6 percent of total gross domestic product (GDP), only a minuscule rise from the 8.5 percent reported the previous year. That 8.5 percent figure represented the lowest percentage in the 20 years the annual study has tracked the industry. Wilson acknowledged that she had expected pressures on logistics networks to push those costs back up toward 10 percent.
The annual study, begun by the late Robert Delaney to track the performance of business logistics operations in the post-deregulation era, is now sponsored by the Council of Supply Chain Management Professionals and the John Cook School of Business at St. Louis University. The study tracks changes in all the major components of logistics costs: transportation costs, inventory carrying costs (including warehousing expenses) and administrative costs.
As for what kept logistics costs in check, Wilson offered several possible explanations. For starters, she noted, logistics costs grew only slightly faster than nominal GDP, which climbed 6.7 percent last year. She also reported that inventory velocity had accelerated, as measured by the inventory-to-sales ratio, which fell to 1.30 months of supply from 1.33 in 2003. The improvement, she speculated, was largely a measure of robust retail sales. Aside from Wilson's speculations, some observers have suggested that part of the explanation may lie in the service sector's growing share of the overall economy. The service sector is much less dependent on logistics services than the manufacturing segment.
All zigs, no zags
Though opinions about what's driving the productivity numbers may vary, there's no disputing that costs in every segment of logistics increased last year, led by soaring transportation costs. Trucking costs jumped by $27 billion, a 5.6-percent increase, to $509 billion. Rail costs rose by more than 10 percent to $42 billion, and maritime costs jumped by $1 billion to $27 billion. Airfreight costs grew by $2 billion to $31 billion,with much of the growth in domestic airfreight. Freight forwarder revenues, after discounting payments to linehaul carriers, also grew by $2 billion to $18 billion.
Logistics professionals found little relief when it came to inventory carrying costs, which rose by 10.6 percent, a result of higher interest rates combined with an increase in total inventories. The average investment in all business inventories reached a record high $1.63 trillion. Wilson estimated total inventory carrying costs at 20.4 percent, including costs of $82 billion for warehousing, plus costs for interest, taxes and other expenses.
As for next year,Wilson warns logistics professionals to expect to see a similar run-up in costs. "Given the continued capacity pressures, the growing shortage of labor in both the trucking and port industries, still rising fuel prices, and the expected costs of meeting security requirements," she said, "logistics costs will continue to rise in 2005."