The nation's shippers simply couldn't catch a break last year—at least not the ones who were trying to hold the line on costs.
That was the main takeaway from the "18th Annual State of Logistics Report" unveiled by the Council of Supply Chain Management Professionals (CSCMP) at a press conference in Washington, D.C., last month. The report tracks trends in transportation, inventory, and logistics costs and calculates the nation's total logistics bill.
An exploding global economy combined with higher fuel prices led to an 11-percent increase in logistics costs in 2006. That's an improvement over the 15-percent rise seen in 2005, but it's still high enough to raise concerns that logistics could give the health-care industry a run for its money when it comes to spiraling costs.
With transportation, warehousing, and inventory carrying costs climbing to record levels, logistics spending topped $1.3 trillion—$130 billion above 2005's total. That represents 9.9 percent of the U.S. nominal gross domestic product (GDP), up from 9.4 percent two years ago. Unless fuel costs show a significant decline over the last six months of 2007, it's almost certain that logistics costs as a percentage of GDP will cross the 10-percent barrier for the first time since 2000. The likelihood of that occurring is especially strong given the economy's sluggish growth rate: The U.S. economy expanded just 0.6 percent in the first quarter, its poorest performance in more than four years.
The report's author, economist Rosalyn Wilson, points out that logistics costs have increased by more than 35 percent in the past five years and by a staggering 63 percent over the last decade. In 2006 alone, inventory carrying costs jumped 13.5 percent over the previous year, mostly due to higher interest rates, while transportation costs rose 9.4 percent.
Rail transportation costs climbed more than 12 percent in 2006—no surprise when you consider that freight revenues for Class I railroads rose $5.8 billion, or 13 percent in that same period. Trucking costs, meanwhile, increased by $52 billion, up 8.8 percent from 2005. Soaring fuel costs and higher salaries for drivers represented a good portion of that increase, and Wilson expects the driver shortage to push costs up further this year.
Ship more, spend more
The transportation component of logistics costs, in fact, is growing at the fastest rate since the first "State of Logistics Report" was issued in 1989. The reason is clear: More goods are being shipped than ever before, making a larger transportation spend inevitable.
In 2006, U.S. ports handled 2.1 million TEUs (twenty-foot equivalent units) more than they did the previous year; that's up 8 percent from 2005 and 30 percent compared to 2003. But ports weren't the only segment of the nation's transportation network to be hit with record volumes. Railroads handled a chart-topping 9.4 million intermodal containers, up 5 percent from the previous year, while car loadings were up 3.1 percent over 2005. Total rail freight volume, estimated at 1.77 trillion ton-miles, was 4.5 percent above the previous record, set in 2005. Meanwhile, strong demand for airfreight services between the United States and Asia pushed air tonmiles up 4.6 percent last year. The one exception to this pattern was trucking, where demand was relatively weak, particularly in the automotive and housing construction markets. Actual tonnage carried declined for the first time in many years, down 1.3 percent in 2006.
One way to alleviate some of the mounting pressure on U.S. port and rail infrastructure is to invest more resources in the inland waterways system, which has received very little funding over the years. Wilson notes that a single barge can move the same amount of cargo as 58 semi-trucks— and at one-tenth the cost. "The nation's waterway system needs to be revitalized and used more heavily to further impact congestion problems," Wilson says. "Water transportation could become a vital resource to meet the nation's freight demands." There's a catch, however: Barges' potential cost savings and ability to relieve highway congestion are offset by the fact that nearly half of the 257 locks on the nation's 12,000-plus miles of inland waterways are functionally obsolete.
Although transportation costs increased significantly in 2006, the "State of Logistics Report" overall paints an encouraging picture. One of the most positive findings, Wilson notes, is that C-level executives are taking greater notice of supply chain operations. "One of the most important trends that has emerged in the last couple of years is more companies' viewing the big picture and trying to understand their entire supply chain, not just their link," she says. "As a result, more are trying to manage the entire chain. C-level executives are involved and supply chain discussions now have a place in boardrooms."