Recovery Not Reaching Supply Chain Yet

'Weak growth' is about the best we can expect through the end of 2011.

If you're thinking that it's gotten a lot more costly lately to transport and warehouse your manufactured products, you're exactly right. Total costs for business logistics in the United States were up 10.4% in 2010, reaching $1.2 trillion. That total accounts for 8.3% of the U.S. gross domestic product.

Although 2010 turned out to be a better year than 2009, it wasn't quite the bounce back manufacturers were looking for -- not by a long shot. "The recovery from the Great Recession has proven to be more elusive and prolonged than any other in our history," admits Rosalyn Wilson, senior business analyst with consulting firm Delcan. She is the author of the annual State of Logistics Report, released by the Council of Supply Chain Management Professionals.

Roughly half of that $1.2 trillion was spent on motor carriers, by far the most prevalent transportation mode (more than 70% of all goods in the United States are carried on a truck), so it's perhaps somewhat good news that trucking costs increased only 9.3% in 2010. That may not sound like much of a bargain, except that the other modes combined (air, water, rail) were up 15.4%. Unfortunately, for manufacturers and carriers alike, the trucking industry is in a world of hurt right now.

"Motor carriers are being set up for the perfect storm," Wilson says. "Capacity is still leaving the market; 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."

As many manufacturers are all too aware, though, freight volumes are not necessarily increasing; if anything, they've been flat to slightly declining. In the short term, this means companies shouldn't have to worry about finding trucks to haul their freight, which is good news. Long term, though, if and when the economy fully recovers, companies should expect to see tighter capacity, higher freight costs and, inevitably, fuel surcharges.

More than 16% of truck capacity has permanently left the market since 2006, Wilson points out. Both ocean shipping (costs were up 14% in 2010) and air freight (11% cost increase) also have capacity constraints. Rail capacity, on the other hand, is abundant, but the costs for rail transportation are up nearly 22%, so the cost differential between long-haul trucking and rail is narrowing.

"Although many industry observers are still predicting a strengthening as we head to the second half of the year, the underlying pieces are not falling into place to support anything more than weak growth," Wilson cautions.

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