Confronting costs

Confronting costs

In covering transportation and logistics since the early 1990s, one sees and hears a lot, but I never expected to hear serious talk of production moving back to the United States. This has been a question on the minds of journalists and many others watching international trade in recent months: When will the low dollar, rising costs in China and elsewhere and the rising cost of fuel conspire to tip the spreadsheet in favor of manufacturing right here in the USA?

As much interest as this has stirred up, if I were a steamship line or logistics provider or other business with a vested interest in stuff continuing to move across oceans in large volumes, I would not be worried. We're a long way away from any substantial shift of manufacturing back to the United States. The question on the minds of logisticians and other corporate strategists is not between Montana or Alabama, but China or India.

But the question does bring to light an uncomfortable reality that shippers confront on a daily basis. Low manufacturing costs are in inverse proportion to distance. The lower the manufacturing cost, the longer the supply chain and therefore the greater the associated cost. This is clearly illustrated in the most recent State of Logistics report from the Council of Supply Chain Management Professionals published in June.

Among other things, the report reported that inventory as a percentage of U.S. GDP has been climbing steadily since 2003 (and currently hovers around 3.5 percent). Rosalyn Wilson, the economist who authors the report each year, says that trend corresponds to the heaviest wave of outsourcing by U.S. companies to Asia.

"Once we started to efficiently adjust to globalization, we realized it costs more to do business this way," she said. "The biggest thing that is driving logistics costs up is changing the way we do business as a result of globalization. We have to have inventory. Just-in-time doesn't work as well when our origin point is China."

That is why in a slow-growth economy where inflation is an irritating presence, taking costs out of the supply chain has become an obsession for logisticians. They are stuck between long-term strategy and current reality. The time has not come, and maybe never will, to reverse a strategy of globalization, yet cost pressures throughout the supply chain are building, and senior management is demanding they be confronted in the field of battle.

The CSCMP report showed that overall logistics spending as a percentage of U.S. GDP has been growing since 2004 and topped 10 percent last year for the first time since 2000. That trend is partly a function of the slowing economy. But logistics costs as the study defines them -- a basket that incorporates inventory carrying, transportation, 3PL services, insurance and some depreciation -- remain stubbornly on the upswing despite a slowing economy that under different circumstances would put a damper on costs.

Between 2001 and 2007, that basket of logistics costs climbed from $966 billion to $1.4 billion, a 44.6 percent increase as against GDP growth of 37 percent over the same period. Roughly half of the total figure is trucking, which has seen costs rise steadily because of the shortage of drivers, replacement of old polluting tractors and, of course, fuel.

How to respond? The strategies are many, and companies are finding that there is rarely a silver bullet that with one stroke will make a significant dent in costs. In fact, the larger and more ambitious the cost-saving initiative, the greater the risk that it won't work. Simple things can accomplish a lot; Home Depot and other large shippers are saving millions simply by making sure containers are fully loaded in Asia for the trip to the U.S.

On a larger scale, high fuel costs are increasing doubts about centralized distribution centers, which save money on the front end but involve lengthy truck trips to a far-flung network of stores. "Length of haul is getting shorter," Wilson said. "From mega-DCs in the late 1990s, the lesson we have learned is that we need more regional DCs."

The problem, of course, is that you have to believe that long-term oil prices are heading upward. Another strategy retailers are adopting is taking delivery of product from suppliers at the last possible moment as a way to keep a lid on inventory costs. Inventory numbers bear this out. "For the first time," Wilson said, "wholesale inventories are higher than retailer inventories."