Logistics On a Bumpy Road to Recovery

Supply chains are being redefined as a reaction to the recession. Are you prepared for a recovery?

The logistics industry took a particularly hard hit over the past year, according to the 2009 State of Logistics Report, released by the Council of Supply Chain Management Professionals (CSCMP). The recession has wreaked havoc with many of the companies that provide transportation and warehousing services to manufacturers, with more than 3,000 trucking companies alone going out of business in 2008, eliminating 7% of the available capacity on U.S. highways. The only bright spot to this decline, at least for manufacturers, is that after rising more than 50% during the previous five years, the cost of logistics actually dropped 3.5% in 2008. The unfortunate reason for this decline is the simple fact that industrial production fell 7.8% in 2008, and thus manufacturers had less freight in the supply chain.

"The fallout from the bankruptcies of Chrysler and General Motors will reverberate through the economy for the remainder of this year," says transportation consultant Rosalyn Wilson, author of the report. The immediate impact of auto plant closures began this summer, and the trickledown effect is now spreading throughout the entire supply chain, she notes. "Even when consumer and industrial spending start to rebound, there is considerable slack in the system that will need to be used up before new production and orders are placed." The eventual good news, though, is that "supply chains are being redefined and processes changed so that the industry will emerge more efficient and resilient."

The total cost of logistics in the United States now stands at $1.3 trillion, representing 9.4% of the U.S. GDP. Inventory carrying costs dropped 13% over the past year, mainly because interest rates were more than 50% lower than in 2007. Warehousing costs were up 9.5%, as goods spent more time in warehouses, while transportation costs in 2008 were up just 2% over the prior year. Breaking down transportation costs by mode:

  • The State of the U.S. Logistics Market 2009

    Warehousing & Inventory Costs (in billions)

    Taxes, Obsolescence, Depreciation, Insurance

    $252

    Warehousing

    $122

    Interest

    $47

    Subtotal

    $421

    Transportation Costs

    Trucks

    $680

    Railroads

    $63

    Air

    $40

    Water

    $39

    Freight Forwarders

    $32

    Oil Pipelines

    $10

    Subtotal

    $864

    Administrative and Related Costs

    $60

    Total Logistics Costs

    $1,345

    Source: 20th Annual State of Logistics Report

    Trucking costs increased 1.3%.
  • Rail transportation was up 10.5%.
  • Ocean and domestic water transportation rose 2.6%.
  • Air cargo dropped 2.4%.

Wilson advises companies to be proactive, not reactive, as the economy slowly recovers. "Analyze your supply chains," she says, "reexamine your supply chain partners and risks associated with them, increase productivity and add new technology. Prepare your company for recovery -- are your suppliers or carriers still in business? Lock in capacity with guarantees before it becomes scarce."

She recommends that companies look into diverting truck movements to rail and inland waterways, as this will "reduce highway wear, address the loss of capacity issues in the trucking industry, lower fuel usage and reduce emissions." Wilson also suggests that companies should review their sourcing strategies and look for potential "nearshoring" sources in the Americas.

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