U.S. logistics costs rose 10.4 percent in 2010 as companies moved rapidly to take advantage of a recovering economy, and they are likely to outpace economic growth for the next several years, according to the Council of Supply Chain Management Professionals’ annual State of Logistics Report.
“GDP was up in 2010, but logistics costs grew even more,” said Rosalyn Wilson, senior business analyst at Delcan Corp. and author of the benchmark report, which has surveyed logistics trends and spending annually since 1988.
Business logistics costs as a percentage of GDP rose to 8.3 percent from a record low of 7.8 percent in 2009, when the recession cut deeply into shipping volume and inventories. Rising transportation and inventory costs caused logistics spending to jump $114 billion to an estimated $1.2 trillion last year.
Transportation and inventory expenses, the two largest parts of logistics costs, each rose about 10.3 percent, according to the report.
For American businesses, the closely watched annual report showed companies spending heavily to get goods into place following the 2008-09 recession, and it showed transportation carriers and logistics were racing to dig out of the steep financial hole created by the downturn.
Transportation spending rose because of higher freight volume, fuel surcharges and rate increases. Spending on trucking, which comprises 78 percent of the survey’s transportation component, increased 9.3 percent. But costs for other modes jumped 15.4 percent. Rail transportation costs soared 21.8 percent last year, reversing a 20 percent decline in 2009. Water transportation registered a 14.1 percent increase, while air freight costs rose 11.2 percent.
Wilson said most of this year’s increased rates appear to result from fuel costs, but transportation capacity is tightening. “Volumes have only recovered about half the recession losses, yet industry capacity, particularly in truck and air, is close to being fully engaged,” she said.
Railroads have capacity to easily handle a 10 to 15 percent increase in volume, and intermodal is likely to gain market share as truckload capacity tightens in the months ahead. “We went into the recession with a driver shortage and with capacity constraints, and we’re going to come out with an exacerbated driver shortage and a more severe capacity crunch,” Wilson said.
Trucking capacity “is still leaving the market,” she said. “Drivers are difficult to find and keep, the truck order backlog is growing, operating costs are rising while revenues are steady, and new regulations are on the way that will reduce the productivity of the drivers and trucks they do have. Couple this with rising freight volumes and the trucking sector could find itself unable to meet demand.”
The State of Logistics report’s conclusions were generally in line with results from a quarterly survey issued last month by Wall Street equity research firm Wolfe Trahan. Shippers in the survey said they expected their total transportation budgets, including fuel, to rise 9 percent over the next 12 months. The sharpest increases were expected for intermodal shipments, followed by rail and truckload.
Wilson said last year’s growth in inventory carrying costs came despite rock-bottom interest rates. Restocking boosted inventory levels and rising expenses for insurance, depreciation, taxes and obsolescence that more than offset a 6 percent drop in warehousing costs.
Inventory carrying costs as a percentage of GDP have declined 45 percent since the late Bob Delaney of Cass Logistics began issuing the annual the State of Logistics report more than 20 years ago. Until the 2009 recession, the sharpest drop was in the early 1980s, when the impact of trucking deregulation was beginning to be felt.
The roller coaster of logistics costs is unlikely to level out soon, Wilson said. With transportation and inventory volume rising on a choppy trajectory, she expects logistics costs “to grow faster than GDP for the next several years.”
Near-term predictions are clouded by the wobbly economy. “2010 was certainly a better year than 2009 but did not turn out to be all we had hoped it would be,” Wilson said. “The recovery from the Great Recession has proven to be more elusive and prolonged than any other in our history.”
Although inventories are up from recession levels, uncertain demand is causing companies to keep stockpiles relatively low. The inventory-to-sales ratio rose from 1.26 to 1.48 in early 2009 as sales dropped during the recession but has hovered at about 1.25 in recent months amid gradual recovery in wholesale and retail sales.
Slower growth is starting to show up in transportation volumes. After recovering sharply from 2009’s weak levels, truck and rail shipment volume growth tailed off in this year’s second quarter.
Wilson said she started out optimistic about 2011. “But now that I have seen five full months of data for 2011 and read other experts’ analysis and forecasts over the last few weeks, it appears that the economy is stalling,” she said. “Although many industry observers are still predicting a strengthening as we head into the second half of the year, the underlying pieces are not falling into place to support anything more than weak growth.”