Carrying Costs

If the annual Council of Supply Chain Management Professionals’ State of Logistics report was entirely about the numbers, U.S. shippers may have reached peak efficiency in managing goods in 2009, when logistics costs reached a historic low point related to GDP.

But the 7.8 percent reading that year had little to do with efficiency; it simply was a stark measure of the rapid retrenchment of American business in the face of the crushing economic downturn.

For comparison’s sake, the average measure of logistics costs relative to GDP over the previous decade was 9.3 percent.

The 22nd annual edition of the report, released in Washington last week, shows the measure rising to 8.3 percent, suggesting shippers moved more rapidly and spent more willingly last year to get raw materials to factories and finished goods to consumers.

But behind the large numbers on the value of business inventory, which grew 10.7 percent, and transportation costs (up 10.5 percent) was the note that the inventory carrying rate actually declined to the lowest point in the 22 years of the report. Overall inventory carrying costs rose 10.3 percent from 2009, but that was because there simply was more inventory in the pipeline. The inventory carrying rate slipped from 19.3 to 19.2 percent, the third straight annual decline.

That’s a result of the ongoing government attempts to keep business moving as the economy finds its cyclical bearings, and especially the low interest rates that make the cost of money.

The low interest rates provide some oxygen for ailing supply chains, allowing them to invest in inventory and get goods moving to help pump up some markets. But for the shippers managing those supply chains, the low inventory carrying rate also suggests the recovery in their end of the business remains fragile and the pressure to get more efficient has hardly let up.

“Volatility is certainly a reality,” said Jeffrey Pilof, group vice president for logistics and operations at Macy’s. “What is important for us to remember to focus on the customer at all times and to have an adequate supply chain to serve our customers.”

For Pilof, that means getting the most out of the “nuts and bolts” in the shipping chain. “Supply chains are fraught with inefficiency. We have become more interested in finding ways to ship less air,” he said. “We want to get the air out of our trucks and out of our of supply chain generally to make it more efficient.”

That doesn’t mean spending less by paying lower prices, he said, but working with carriers to get the most out of the inventory and the transport movements you have.

“Collaboration is key,” he said. “We’ve seen that a lot of people did poorly with transactional relationships with carriers during the downturn, where shippers put out bids and tried to squeeze pennies out of the carriers.”

Now, he said, “Companies are viewing their relationships in a more strategic manner.”
Of course, it would help if the broader economy caught up to the logistics strategies.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at Follow Paul Page on Twitter,

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