Warehousing Costs Challenge Inventory Strategies

Retailers' JIT demands are forcing manufacturers to spend more on logistics.

If you've got the nagging feeling that it's costing you a whole lot more to transport and distribute your products these days, you're not alone: Logistics costs in the United States rose over 11% in 2006 to $1.3 trillion, a hefty increase of $130 billion over 2005. According to transportation consultant Rosalyn Wilson, who delivers the annual State of Logistics Report for the Council of Supply Chain Management Professionals (CSCMP), this represents a record high for business logistics costs.

A rise in logistics costs isn't necessarily a bad thing, since it also points to an increase in demand for products of all types. "The volume of freight being moved is meeting and even exceeding estimates," Wilson notes. The amount of cargo containers handled at U.S. ports in 2006 was up by 8%, railroads accommodated a record 9.4 million containers, and air freight ton-miles were up 4.6%, she observes.

The High Cost of Transportation
Warehousing & Inventory Costs (in billions)
Taxes, Obsolescence, Depreciation, Insurance $252
Warehousing $101
Interest $93
Subtotal $446
Transportation Costs
Motor Carriers $635
Railroads $54
Air $38
Water $37
Freight Forwarders $27
Oil Pipelines $10
Subtotal $801
Administrative and Shipper-related Costs $58
Total Logistics Costs $1,305
Source: 18th Annual State of Logistics Report
On the other hand, though, the cost of warehousing increased dramatically last year, jumping more than 12% from $90 billion in 2005 to $101 billion in 2006, while total business inventories rose 6.2%. "Suppliers now have to hold inventory in various segments of the supply chain to meet the just-when-we-need-it demand of retailers like Home Depot and Target," Wilson says. For many suppliers, "business has changed over the past year," she explains. "Rather than one large shipment a day or every other day to stores, they are reporting multiple deliveries in one day to meet their customer's requirements."

A key trend is the movement by companies to view the big picture, i.e., "trying to understand their entire supply chain, not just their link," Wilson notes. In particular, more companies are using Web-based resources to research and chart the movement of their shipments.

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