It’s Uphill All the Way

There’s not a lot of good news in this year’s State of Logistics Report, as both shippers and carriers are still hurting.

Having reached the mid-point of the year, it would be nice to be able to point to some distinct and unmistakable signs that the economy has come roaring back, buoyed by an ever-resilient U.S. logistics sector. It would be nice, but unfortunately, it wouldn’t exactly be accurate. Consider, for instance, the current state of trucking in this country.

More than 70% of all the freight that moves within the United States is carried on trucks, making what Rosalyn Wilson has to say particularly ominous for shippers who use them. “Motor carriers are being set up for the perfect storm,” says Wilson, senior business analyst with consulting firm Delcan, and author of the 2011 State of Logistics Report from the Council of Supply Chain Management Professionals, presented last month in Washington, D.C. “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.”

The good news (if you want to call it good) is that freight volumes have actually been on the decline recently, so companies should still be able to find enough trucks to move their freight, at least for the short term. Of course, for the economy to fully recover, companies will need to markedly increase their freight volumes, and that could lead to such obvious problems as tighter capacity, higher freight costs and the inevitable fuel surcharges.

Every year, Wilson crunches numbers from various sources to compile the closest thing the logistics field has to a definitive overview of the market. According to her analysis, U.S. business logistics costs rose 10.4% in 2010, to $1.2 trillion, which means that logistics (i.e., transportation and warehousing) accounts for 8.3% of U.S. Gross Domestic Product (GDP).

Although there were a few bright spots for shippers last year, such as lower warehouse costs (down 6% in 2010), those savings were offset by increases in other inventory-related areas, such as insurance, depreciation, taxes and obsolescence.

On the transportation side, freight volumes are still only about halfway back to where they were pre-recession, but capacity is nearing the point of being fully engaged, especially for truck and air. Wilson puts it bluntly: “The recession had a devastating effect on total industry capacity, which is much lower than it was in 2007. The recovery is not being felt evenly throughout the economy, and 2010 did little to shore up precarious carriers who have been hanging on hoping to be rescued by a resurgence in the economy.” On top of that, transportation costs increased 10.5% in 2010.

The capacity crunch, Wilson says, is a problem that isn’t going to go away, as more than 16% of truck capacity has permanently left the market since 2006. On top of that, she adds, the trucking sector has lost more than 13% of its employees over that same period, as drivers chase better pay, benefits and working conditions, either at other trucking companies or within other industries. Today, she notes, one out of every six truck drivers is 55 or older; conversely, fewer than one out of four is under 35. Attracting drivers, Wilson observes mordantly, “has been a challenge since motorized vehicles replaced horse-and-cart for the movement of freight.”

Rail capacity is plentiful, but be aware that the costs for rail transportation are up nearly 22%, Wilson reports. On the other hand, overcapacity is the single biggest issue for ocean shipping, where costs were up 14% in 2010. Air freight costs were up 11% in 2010, with fleet capacity being reduced by 12%.

Admitting that recent economic prospects had a lot of “ugly details,” Wilson predicts that the second half of 2011 will be one of weak growth, at best. “It has been close to two years since the recession was pronounced over, [but] for many Americans things have not improved.”

Offering at least a little bit of hope, Wilson asserts that despite the many challenges facing shippers and carriers in the months ahead, she’s confident that the same spirit of innovation and supply chain excellence that has carried the day so often in the past will shine through again. And here at MH&L, we’ll continue to focus on the solutions and best practices that today’s companies are developing to compete and win in the marketplace.

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