Logistics expenditures hit record lows in '09, report says; led by sharp fall in transport spending

One word could best sum up the state of the U.S. logistics industry last year.

Ugly.

The cost of operating the nation's business logistics system declined in 2009 to $1.1 trillion, an 18.2-percent drop from 2008 levels and the steepest year-on-year fall since record keeping began in 1981, according to the annual State of Logistics Report released today in Washington, D.C.

In all, business logistics costs last year declined by $244 billion over 2008, the report said. In the past two years, logistics costs fell by almost $300 billion, with most of 2008's drop occurring after the financial crisis hit in September and U.S. and world economies went into virtual free-falls.

The 2009 numbers mark a sharp turnabout from the 2003-2008 period, when logistics costs rose in aggregate by 50 percent as the nation recovered from the relatively brief and modest recession of 2000-01.

Logistics costs measured as a percentage of U.S. gross domestic product (GDP), a closely watched metric of the supply chain's relevance to the nation's output of goods and services, dropped last year to 7.7 percent. That key ratio also hit a level not seen since data has been kept.

In prior years, a level below 10 percent would have been hailed as a positive trend, an indication the supply chain was operating in a productive, efficient, and cost-effective manner. In the early 1990s, for example, the logistics community celebrated when the level fell into the single digits for the first time.

Last year's decline was a different story, however. As the recession forced virtually every company in the supply chain to slash expenses, shipment levels declined and freight rates plunged.

Transportation costs fell a staggering 20.2 percent year over year, according to the report. Trucking, which constitutes 78 percent of the report's transportation component, posted a decline of 20.3 percent, according to the data. The other transportation modes checked in with an even worse 20.5 percent drop, the report said.

Silver lining?
The one glimmer of good news was that historically low interest rates held down the costs of carrying inventory. Inventory carrying costs fell 14.1 percent last year, paced by a nearly 10-percent drop in the level of interest rates charged to carry the goods, the report said. The level of physical inventory dropped 4.6 percent year over year, the report said.

Unlike the 2000-2001 recession when businesses began shedding inventories almost immediately, inventory levels during the recent downturn continued to climb until the recession's mid-point in mid-2008, only to begin falling in the second half of the year and through the first three quarters of 2009, the report said. From mid-2008 through September 2009, inventory levels dropped 12.6 percent, according to the data.

U.S. businesses liquidated $305 billion of inventories in the second and third quarters of 2009 alone as the financial crisis led to a sharp plunge in orders and as businesses unable to obtain short-term financing due to a freeze in credit markets began dumping their existing stock. To make matters worse, orders placed months before the downturn took hold were not fulfilled and delivered until well into the recession and after market conditions had dramatically changed, the report said.

Rosalyn Wilson, the report's author, said a modest improvement in 2009's fourth quarter could not offset "very bad" economic conditions especially in the first half of the year. Wilson said most of U.S. transport, notably trucking, had already been suffering through a freight recession before the downturn overtook the entire economy.

While activity so far in 2010 has picked up substantially, Wilson said in an interview before the report's release that the good current results are "only helping us regain ground lost, not grow."

The report, the 21st edition, was sponsored by Penske Logistics and by the Council of Supply Chain Management Professionals.