In 2011, the nation's business logistics system had one of those years that people won't feel the need to forget—but they won't feel the urge to remember either.

The 23rd annual "State of Logistics Report," which chronicled the nation's logistics output for the year, showed a modest change over 2010 totals. U.S. logistics costs reached $1.28 trillion, a 6.6-percent increase over 2010 levels and a 17 percent increase over the trough in 2009 as the U.S. grappled with the financial crisis and subsequent recession. (Total logistics costs are calculated by adding together business inventory costs, transportation costs, shipper-related costs, and logistics administration costs.)

Logistics costs as a percentage of nominal gross domestic product (GDP), a ratio often cited to measure the supply chain's efficiency in moving the nation's output, rose to 8.5 percent in 2011, up slightly from 8.3 percent in 2010. In 2009, the figure dropped to 7.8 percent.

In the 1990s, as the nation's supply chain was shaking off the yokes of rail and truck regulation and bringing free-market processes to bear on the marketplace, a ratio in the single digits was hailed as a breakthrough in logistics productivity.

Over the past three years, however, a low ratio has come to underscore a significant decline in shipping expenditures and transportation costs as shippers and carriers downshifted in response to a severe decline in economic activity from the levels of five or six years ago.

The findings of the 2011 report, which were released June 13 in Washington, D.C., paralleled what turned out to be a static year for the nation's economy. After a year of peaks and valleys, U.S. economic activity ended 2011 relatively flat over 2010 levels, with GDP growth rising by an anemic 1.7 percent.

Correspondingly, the freight transport industry started the year with strong gains in volumes and significantly higher freight payments through its first half, according to the report. However, the economy began to slow down in July, with the only sign of strength being an earlier-than-normal buildup of inventories ahead of the July 4 holiday, the report said.

Overall, Rosalyn Wilson, the report's author, called 2011 a "rather unremarkable year" for logistics statistics. Still, her 25-page analysis was sprinkled with more optimistic comments than were found in the last two distinctly downbeat reports.

"Things have not been especially robust in the first half of 2012," she wrote. "However, there are enough signs of improvement that [the] economy really does seem to be on the way up."

A GOOD YEAR FOR RAIL
For 2011, transportation "costs"—or revenues generated by freight carriers—rose 6.2 percent over 2010 levels. But that increase came from higher freight rates and not increased volumes, the report said. Rates increased broadly in 2011 and largely held their ground, allowing trucking companies in particular to recover some of their increased operating expenses, the report stated. However, higher labor, equipment, and insurance costs still ate up a good chunk of those gains, according to the report.

In the transportation industry, the big winners for the year appeared to be railroads and third-party logistics providers. Third-party logistics providers—which account for a large portion of the report's "freight forwarder" category—posted a 10.9 percent year-over-year revenue gain, substantially surpassing its pre-recession levels, the report said. Rail revenues, in aggregate, climbed 15.3 percent year-over-year largely on the back of increased demand for their intermodal offerings.

For years, large truckers have used rail intermodal to reduce their costs of managing an over-the-road fleet. For the first time ever, mid-sized truckers began doing the same in 2011, the report said.

Wilson said the railroads are well positioned to capitalize on the prospects for tightening truck capacity likely to continue through 2012 and in coming years. Wilson advised shippers and intermediaries to be prepared for fewer trucks, fewer drivers, and fewer trucking companies in the marketplace.

"I urge everyone to begin making contingency plans for the day you cannot get a truck," she wrote. "The railroads are standing by with a great offer and have the capacity to take up the slack."

Rick J. Jackson, executive vice president of Mast Logistics, a unit of Columbus, Ohio-based retailer Limited Brands, Inc., said the reliability of intermodal service has improved to the point that his company is comfortable moving expensive garments with the railroads.

"In past years, we may have been reluctant [to use intermodal], but now we've found that their services have become more reliable for time-sensitive goods," Jackson said in comments at the Washington event.

Not every segment of the transportation industry fared as well however. Ocean and airfreight carriers did relatively poorly in 2011, the report said. A decline in ocean fright demand—especially for what turned out to be a nonexistent peak pre-holiday shipping season—led to a relatively small gain in containerized volumes, the report said. Traffic rose by between 1 and 5 percent over 2010 levels, depending on the port surveyed, the report said.

Airfreight revenue fell 2 percent year-over-year due to weakness in domestic demand and a decline in overall international ton-mile traffic.

STABLE INVENTORY-TO-SALES RATIO
Overall inventory carrying costs (another key part of total logistics cost) rose 7.6 percent year-over-year, according the report. Inventory carrying costs are calculated as the investment in all business inventory plus interest; taxes, obsolence, depreciation, and insurance; and warehousing costs. The investment in all business inventories in 2011 rose to $2.1 trillion, an 8 percent increase over 2010, according to the report. The increase in inventory levels also resulted in an 8.2-percent jump in insurance, depreciation, taxes, and obsolescence. Warehousing costs rose by 7.6 percent, as greater demand for inventory capacity pushed rents up.

The higher costs and rising demand offset the benefits of declining interest rates for holding inventories, the report said. Interest costs in 2011 dropped 31.4 percent from already historically low levels. Indeed if last year's interest levels were replaced with those from 2005, logistics costs in 2011 would have increased by close to $70 billion, the report said.

The retail inventory-to-sales ratio (which measures the percentage of inventories a company currently has on hand to support its current level of sales) stood at 1.27 at the end of 2011. This is a marked reduction from the high levels in 2009 when the ratio spiked to 1.49 as final sales dropped dramatically during the recession.

The current ratio underscores retailers' success in keeping their inventories lean and requiring their suppliers only to deliver the product they need at that point in time, according to the report. Wilson said the ratio is likely to remain stable as retailers leverage better processes and increasingly sophisticated information technology to more accurately calibrate inventories with end consumer demand.

Additionally, U.S. exports rose 14.5 percent to $2.1 trillion, paced by record gains in exports of manufactured goods, the report said. Domestic industrial production of consumer goods rose 2.7 percent in 2011, compared to a 0.8 percent gain in 2010 over prior-year levels.

The "State of Logistics Report" is produced for the Council of Supply Chain Management Professionals (CSCMP) and sponsored by Penske Logistics.

EDITOR'S NOTE: For an even deeper look at The 23rd Annual "State of Logistics Report," view the DC Velocity webinar The 23rd annual "State of Logistics Report": A deeper dive.