U.S. business logistics costs rose at a slower rate last year than in 2010, but remained well below their pre-recession peak, according to the annual State of Logistics report.
“We have not yet regained the 2007 level … In truth, we may not get back there for quite some time,” said the report’s author, Rosalyn Wilson, senior business analyst at Delcan Corp.
Wilson struggled to come up with a title for the 23rd annual report, co-sponsored by the Council of Supply Chain Management Professionals and Penske Logistics. She finally settled on “The Long and Winding Recovery,” which applies to logistics as well as the economy.
“Neither the economy as a whole nor logistics costs grew much in 2011,” she said.
Despite ultra-low interest rates that kept a rein on inventory carrying costs, growth in total logistics costs outstripped the 1.7 percent growth in GDP. U.S. business logistics spending rose 6.6 percent to $1.28 trillion last year after a 10.4 percent jump in 2010, when the economy was recovering from the recession.
Logistics spending as a percentage of GDP rose to 8.5 percent from 8.3 percent in 2009. The logistics efficiency ratio bottomed out at 7.9 percent in 2009, when the recession cut deeply into companies’ inventories and shipping volume. The ratio was 9.9 percent in 2007, when a buoyant economy caused logistics costs to hit $1.39 billion.
Last year’s increase in logistics spending came from transportation costs, which rose 6.2 percent because of higher rates, and carrying costs, which increased 7.6 percent despite reduced interest rates that made it cheaper for companies to hold inventory.
Low interest rates partially masked the slippage in logistics efficiency. If interest rates were at 2005 levels, the logistics spending would be $69 billion higher and logistics costs would be 8.9 percent of GDP, Wilson said.
Wilson said she doesn’t foresee an economic rebound that would cause the Federal Reserve to raise interest rates anytime soon. “Interest rates have been kept low for the last three years, and it sounds like they could stay that way for another three,” she said.
Last year’s rise in transportation costs came despite virtually flat volume. Companies’ spending on truck freight, which comprises three-fourths of transportation costs, rose 6.2 percent. Railroads’ revenue jumped 15.3 percent. Third-party logistics providers and forwarders posted a 9 percent gain.
“2011 was a rather unremarkable year as far as logistics statistics were concerned. As predicted, the economy continued to follow its slow, bumpy growth path, and freight volumes were subject to the ups and downs,” Wilson said.
Business inventories rose throughout the year in line with a gradual recovery in the economy. The State of Logistics report noted that retailers are keeping inventories tight but that wholesale and manufacturing inventories are inching up.
The retail inventory-to-sales ratio “was very stable during 2011, indicating the retailers have adjusted to the new level of spending and unpredictable changes in demand,” Wilson said.
Although inventory levels rose, retailers’ seasonally adjusted monthly inventory-sales ratio stayed within a range of 1.32 to 1.36 last year. The ratio peaked at 1.56 in December 2008, when the recession caused sales to plunge.
Rising inventories absorbed warehouse capacity and caused warehousing costs to rise 7.6 percent last year, the State of Logistics report said. Despite renewed construction of warehouses and distribution centers, some markets report tight capacity.
Motor carriers were able to raise rates last year, but their outlook is clouded by higher costs for driver pay, insurance, fuel and new equipment. Trucking capacity is being strained by hours-of-service rules and the Federal Motor Carrier Safety Administration’s Compliance, Safety and Accountability program.
Intermodal traffic has benefited from trucking’s cost increases and capacity constraints. “Intermodal volume has recovered 84 percent of its 2006 volume, clearly demonstrating that intermodal growth is the growth sector in freight transportation,” Wilson said.
“More trucking companies are partnering with rail for intermodal service to avoid problems caused by the driver shortage and to avoid the cost of acquiring new equipment or put off replacing older equipment,” she said. “In fact, many carriers are investing in new intermodal chassis and trailers, rather than full rigs.”
Large carriers are investing in new equipment — Schneider National plans to replace one-third of its 10,000-plus tractors by the end of 2012. However, Wilson cited a Transport Capital Partners survey in January that found almost three-fourths of motor carriers plan to add no new capacity this year or keep their additions under 5 percent.
“Further, 28 percent of truckers surveyed said they are considering selling out in the next 18 months if conditions don’t improve. That’s the highest total percentage since the survey began almost three years ago,” she said.
Nearly 40 percent of smaller carriers are considering an exit, compared with 23 percent of larger carriers.
Railroads, meanwhile, have invested in new capacity and “are in very good shape from an infrastructure, equipment and personnel basis,” she said.
Although the outlook is clouded by the eurozone crisis and other problems, Wilson warned that transportation capacity eventually would tighten as the economy recovers.
“Capacity issues are on the horizon,” she said. “I urge everyone to begin making contingency plans for the day you cannot get a truck. The railroads are standing by with a great offer and have the capacity to take up the slack.”