upbeat despite the downturn

For 19 years now, The State of Logistics Report has provided an annual snapshot of logistics costs across the U.S. economy. While some critics have disputed the methodology behind it, the report has become the mostly widely cited barometer of those costs. For most of those years, it has shown a relatively steady trend—the decline of logistics costs as a percentage of the U.S. gross domestic product (GDP).

Not so this year. When she unveiled the latest study's results earlier this summer, the report's author, Rosalyn Wilson, announced that logistics costs as a percentage of GDP had risen in 2007, climbing above the 10-percent mark for the first time since 2000. During a press conference in Washington, D.C., Wilson also noted that total U.S. logistics costs for 2007 totaled $1.4 trillion, an increase of $91 billion over 2006, the fourth year in a row the number has hit a record level.

In her report, which is sponsored by the Council of Supply Chain Management Professionals (CSCMP), Wilson cited a number of reasons for the rise in logistics costs. Not surprisingly, skyrocketing transportation expenses made the list. She also cited higher inventory carrying costs—a result of excess inventory in the system as consumer spending slowed. In fact, she said, inventory carrying costs grew 9.0 percent last year, faster than transportation costs, which were up 5.9 percent. "Costs were up for virtually every component of business logistics," she added.

Wilson, who subtitled her report "Surviving the Slump," does not expect an immediate turnaround. The Federal Reserve insists that the country has not yet entered a recession, she said, "but, in my opinion, neither have we entered a recovery." Wilson added that she believes the remainder of 2008 will bring more of the same, with a slow recovery to begin next year.

A glass half full?
Despite the generally gloomy news in the report, a panel of shippers and carriers who discussed the findings after the presentation sounded relatively upbeat.

John Gray, senior vice president for policy and economics for the Association of American Railroads, said, "I reject the idea that this is a frightening time. There have been few times that it has been more exciting to be in the transportation business." While he acknowledged that the railroads, like other modes, have had to contend with rising fuel costs, he nevertheless insisted that he foresees a strong future. "This is a time of unprecedented opportunity," he said.

Kevin Smith, senior vice president of supply chain and logistics for drugstore chain CVS, likewise took issue with the gloomy prognostications. "In talking to my colleagues, we have a much brighter outlook," he said. Smith wasn't the only shipper to express those sentiments. Despite the collapse of the housing market, Brian Hancock, vice president of supply chain for Whirlpool Corp., whose appliance sales are tied to that market, also said he was confident about the future.

But fuel costs, and what they mean to supply chains, were clearly on the minds of the panelists. Rick Jackson, chief operating officer for Victoria's Secret Direct, said, "Our supply chain is built around a cost-service proposition, and speed is a very important part of that proposition." If fuel prices continue to climb, he said, his company may be forced to reassess the cost/service trade-offs, and perhaps "make some paradigm-changing decisions about what the service model ought to be and what the speed model ought to be."

Cliff Otto, president of Saddle Creek Corp., a third-party logistics service company, added that he was already seeing evidence of some supply chain realignments. Soaring fuel and inventory costs, he said, are causing shippers to reexamine their distribution networks and number of distribution points to determine the most cost-effective way to serve customers.

Jackson said he is concerned in particular about the future of the truckload market, which has lost a significant amount of capacity in the past two years. Historically, capacity in that market ramps up quickly during economic recoveries. That may have changed. "As capacity is leaving the market, so have the assets," he said. "That hasn't happened in the past."

Wilson noted in her report that foreign buyers are purchasing many of the trucks sidelined by the downturn, permanently removing them from the United States.

The panel's trucking representative, Jim O'Neal, president of O&S Trucking, agreed that shippers may be in for a tough time when business picks up, which he thinks will happen sooner rather than later. He said he believes the economy is "on the precipice of a significant recovery." When the turnaround comes, he warned, shippers could face a severe shortage of trucking capacity.

For the present, though, Wilson noted, shippers have the upper hand in price negotiations with carriers.