U.S. Logistics Costs Hit Record High

Good supply chain practices are helping keep a rough situation from getting worse.

The cost of logistics in the United States rose by nearly $100 billion in the past year, to $1.4 trillion, a record high for the fourth-consecutive year and the equivalent of 10.1% of the U.S. gross domestic product. That represents a jump of 7% from the $1.3 trillion in costs for the previous year, and that's actually good news, since a year ago the increase was in the double digits (11%).

"For the second year in a row the U.S. supply chain industry has had to operate in a soft demand environment, with soaring fuel prices and even more pressure to perform efficiently," notes transportation consultant Rosalyn Wilson, author of the annual State of Logistics Report for the Council of Supply Chain Management Professionals (CSCMP). The industry has reacted well, she observes, "with a more responsive supply chain that has enhanced visibility, added flexibility with dynamic rerouting and improved reliability." Pricing power, she adds, is now firmly in the hands of the manufacturers and retailers, rather than the freight carriers.

Transportation costs were up 6%, and for the carriers fuel surcharges were one of the major contributors to their revenue gains. "Average diesel fuel prices were 6.5% higher in 2007 than in 2006, and have almost doubled since 2000," Wilson notes. For anybody wondering why it costs so much more to ship goods via truck, she points out, "These days it costs over $1,100 to fill up a big rig with a pair of tanks that hold 250 gallons, compared to about $720 last year. Fuel is close to or has surpassed labor as a trucking company's top expense." Manufacturers are using rail more often to move long distances, shifting trailer loads away from trucks and instead having them loaded on the much less expensive railroads.

The situation isn't any better for air freight operators; if anything, it might be worse. The Air Transport Association has estimated that every dollar increase per barrel of oil adds another $465 million in airline fuel expenses. "Most air freight operators are reporting that prices are rising faster than freight rates are rising to cover them," Wilson observes. As UPS reports, manufacturers are compensating for the increases and fuel surcharges by shifting their freight from the faster air cargo options to slower and less expensive ground shipments.

Meanwhile, warehousing costs are up nearly 10%. "The move to more regionalized distribution centers continued in 2007," she says, "with many more firms announcing plans to relocate or open new centers serving smaller markets. These changes are being made to shorten delivery times and length of haul to save fuel."

Wilson also sounds a loud note of cautionary alarm when she says, "Our nation's transportation infrastructure is failing and will not meet our needs in the future." She cites crumbling and dangerous bridges, a highway system that is operating at capacity, dredging issues for ports and waterways, and an inadequate Highway Trust Fund. "The only successful solution to the problems is going to require public-private partnerships and a willingness for all players to contribute. National leadership is needed now to find and implement solutions."

The State of the U.S. Logistics Market

Warehousing & Inventory Costs (in billions)
Taxes, Obsolescence, Depreciation, Insurance $273
Warehousing $111
Interest $103
Subtotal $487
Transportation Costs
Trucks $671
Railroads $58
Air $41
Water $38
Freight Forwarders $30
Oil Pipelines $10
Subtotal $848
Administrative and Shipper-related Costs $62
Total Logistics Costs $1,397
Source: 19th Annual State of Logistics Report

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