New Reality

New Reality

Copyright 2008, Traffic World, Inc.

They say a rising tide will lift all boats, but what if you''re sitting in a truck?

I''m not talking about floodwaters, but the seemingly inexorable rise of shipping costs detailed by the annual State of Logistics Report released by the Council of Supply Chain Management Professionals.

The latest edition of the report finds that logistics spending, spurred by rising energy costs, climbed for the fifth straight year in 2007, outpacing the anemic economy to reach $1.4 trillion.

As a percentage of Gross Domestic Product, logistics spending topped 10.1 percent, breaking the double-digit barrier for the first time since 2000.

That''s not because shippers and their transport partners are doing anything wrong - if anything, they''ve become even more efficient as costs rise.

They''re simply dealing with what Rosalyn Wilson, the report''s author, called a "reality" in global supply chains: "Delivering the goods now costs more."

That reality is pushing long-term changes in supply chain management. One place that''s reflected is in record levels of inventory at the wholesale level.

For the fourth year in a row, inventory carrying costs rose faster than transportation costs, spurred by an 8.7 percent rise in inventories. That increase is partially attributable to goods shelved by a slow economy, but also to changes in the way businesses handle stock in a global environment, Wilson said.

"We continue to manage that inventory efficiently, as the trend in the U.S. inventory-to-sales ratio for the past 10 years shows." That ratio declined from 1.43 in January 1998 to 1.27 and the end of 2007.

Efficiency, however, is not enough. As Wilson points out, shippers, carriers and 3PLs have made enormous gains in efficiency and productivity since the end of the last recession in 2001. Yet logistics costs continue to rise - even if they did rise at a lower rate in 2007 than in 2006 or 2005, when they surged 15.2 percent.

To truly constrain spending, all parties in the supply chain will have to rethink how they do business, not just how to make their current business more efficient.

It''s similar to the challenge faced by the average driver who wants to spend less money on gas. He or she certainly can try to get better gas mileage by driving more efficiently (and obeying speed limits), but the surest route to savings is to make fewer trips or park the car and get on the bus.

There''s plenty of evidence that shippers are already making such decisions by changing the frequency with which they ship, consolidating loads and shortening the distance those loads will travel.

They''re going to have to do more if they want to avoid what Wilson predicts will be a painful "capacity crunch" once the economy picks up - most likely, she says, in 2009. Capacity is permanently leaving the trucking industry, she said, referring not just to trucking bankruptcies but decisions by many carriers to shrink fleet vehicle pools and sell excess equipment overseas.

"We can expect some very tight capacity restraints when the economy turns around," she said. And, of course, higher logistics costs.