Logistics' Tough Climb

The late Bob Delaney, who created the annual State of Logistics report, liked to describe its comparison of business logistics spending to GDP as a batting average for supply chain performance.

Delaney was an avid baseball fan, however, and he understood that it’s hard to compare ballplayers from different eras — and that the same goes for logistics.

That’s a key to interpreting the findings of the newly issued 23rd annual edition of the State of Logistics report, sponsored by the Council of Supply Management Professionals and Penske Logistics.

The report said U.S. logistics costs rose 6.6 percent last year, compared with 1.7 percent growth in the overall economy. Logistics spending totaled 8.5 percent of GDP, compared with a “batting average” of 8.3 percent in 2010.

Why the increase? It’s the economy, said Rosalyn Wilson, senior business analyst at Delcan Corp. and author of the report. She said the increase reflects a gradual, uneven recovery from the recession.

When times are good and companies are confident of sales, they’re more willing to spend on transportation, warehousing and inventory. That’s what happened during most of the last decade, when logistics spending gradually rose to a 2007 peak of $1.39 billion, or 9.9 percent of GDP.

When times are bad, companies cut back like everyone else. In 2009, the logistics-to-GDP ratio fell to a record low of 7.9 percent. The improvement, however, came from low demand, not increased efficiency.

Wilson said a healthy logistics-to-GDP ratio is probably close to 10 percent. She expects logistics interests to boost inventory and transportation spending as the economy continues its fits-and-starts recovery.

As William Cassidy and Mark Szakonyi report in this week’s JOC cover story, the economy appears to be in a gradual, uneven recovery. John Lanigan, executive vice president and chief marketing officer at BNSF Railway, said BNSF doesn’t expect to match its 2006 peak volumes until about 2014. That would be eight years between economic peaks, the longest such span since the Great Depression, he said.

Retailers have become adept at minimizing stockpiles and pushing inventory onto manufacturers and wholesalers, the latest State of Logistics report noted. Wilson expects this trend to continue.

The report’s biggest surprise, Wilson said, was that freight rates rose “in a non-constrained environment with only lackluster volume growth.” Operating and regulatory issues already are tightening truck capacity, she warned.

Two shippers at the report’s presentation, Rick Sather of Kimberly-Clark and Rick Jackson of Limited Brands’ Mast Global Logistics unit, said their companies already are seeing deterioration in truckers’ on-time delivery rates.

Wilson said capacity problems are likely to worsen as the economy comes back. And despite ups and downs, signs indicate it is coming back.

“It really does seem that we are on our way up,” Wilson said. “By on our way up, I don’t mean we’re taking the elevator — we’re taking the stairs.”

Contact Joseph Bonney at jbonney@joc.com. Follow him on Twitter @josephbonney.

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