an altered state

The nation got its first look at the United States' annual freight and logistics bill last month, and so far, nobody's demanded an audit. That's probably because the results were generally in line with expectations. If nothing else, the report confirmed the perception that with an economic recovery come rising costs. And indeed, the 15th annual State of Logistics Report showed that total logistics costs in the United States had headed upward in 2003, rising by 2.9 percent over the previous year's figures to reach $936 billion.

Just as importantly, the report also demonstrated how effective the nation's logistics managers have proved to be in wresting productivity improvements from their operations. Despite rising costs, these executives managed to hold total logistics expenditures to just 8.5 percent of the nominal gross domestic product (GDP)—making this the third year in a row that logistics costs fell as a percentage of nominal GDP. The latest figure, which is down from 8.7 percent last year, is also the lowest percentage recorded in all the years the report's been published.

But it's unlikely that next year's report, which will examine the numbers from this year, will deliver the same good news, says Rosalyn Wilson, the report's author. "A lot of things will impact this year," she says. "We can't hold our breath and expect interest rates to stay at 1 percent.With everybody adjusting to global business, there are some reports of increased investment in warehousing. I don't see how transportation costs will not make big jumps. I don't think we'll see it [the logistics percentage of GDP] go down again." She expects that longer and more variable lead times resulting from longer international supply chains are causing businesses to adjust how they manage inventories. "I think there will be a blip, and then we will adjust again," she says.

The annual State of Logistics Report, sponsored this year by the Council of Logistics Management, is widely considered the best measure of logistics costs available, though some critics dispute the methodology used. For the first 14 years of its existence, the report was spearheaded by Robert V. Delaney.When Delaney died on April 2, Wilson, the report's co-author, took on the responsibility of completing the report.Wilson is an independent consultant with 25 years' experience in transportation and logistics research. She also works for Reality Based IT Services Ltd., an information technology security firm.

Itemized statement
Reviewing this past year's results, Wilson points out that managers had several factors working in their favor as they fought to hold down costs. Not least among them were low interest rates. Commercial paper rates hovered around 1 percent, according to the report, which had a direct effect on holding down inventory carrying costs.

That's not to say that all conditions were favorable, however. During the year, logistics costs began to nudge upward. Wilson says the largest portion of the cost increase can be traced to rising transportation rates. Trucking costs, in particular, rose relatively quickly, she reports. That had a big impact on the total bill because trucking represents more than 50 percent of total logistics costs. She attributed the higher trucking costs to tight capacity, which gave truckers more leverage to use in recovering some of their own higher costs, particularly for insurance and fuel.

Costs of rail transportation rose slightly during the year. At the same time, domestic air freight revenues were flat and maritime and domestic water traffic fell by $1 billion. High demand for goods from Asia and constraints on ocean liner capacity in the Pacific led to 6- to 10- percent growth in eastbound trans-Pacific shipments and shipping rate hikes of 40 percent on average.

The cost of warehousing also remained flat, Wilson says. But she notes that some reports suggest that warehousing costs began to rise toward the end of last year.

It's a small, small world
But as they plan for the future, logistics professionals will have to look at much more than these largely domestic cost trends, Wilson warns. "The phenomenal growth in world trade and the rebound in the U.S. economy have profound implications for logistics," she writes. "In 2003, for example,we saw the demand for shipping outstrip the capacity in many markets, altering the supply/ demand equilibrium and pushing up prices."