How to beat the high cost of shipping

July 1, 2004
How to beat the high cost of shipping WASHINGTON To the surprise of no one, logistics costs are on the rise, driven by increases in transportation costs.

How to beat the high
cost of shipping

WASHINGTON — To the surprise of no one, logistics costs are on the rise, driven by increases in transportation costs. On the bright side, as a percentage of total U.S. gross domestic product (GDP), the logistics profession has helped the economy by reducing the impact of those logistics costs.

Shippers have managed inventory costs and warehousing costs by striving to make those functions more efficient, but that's about to change. With business inventories at a record high, supply chains stretching around the globe and interest rates bound to rise, inventory carrying costs and warehousing will trend upward in the coming year.

Rosalyn Wilson would claim no prior knowledge, but in announcing the results of the 15th annual State of Logistics Report (sponsored by the Council of Logistics Management), she clearly stated interest rates had to go up. That was just one day before Federal Reserve Board chairman Alan Greenspan strongly hinted that the Fed would raise interest rates to keep inflation in check.

Wilson says inventory carrying costs and shipper-related costs should show increases in the coming months. It's amazing that interest rates have remained at these historic lows for a full year, she observes. Business inventories were up over 3% in 2003, according to Wilson, reaching $1.49 trillion, so it was lower interest rates, not lower inventories, that contributed to holding inventory carrying costs at $300 billion — up a slight $2 billion (or 0.6%) over 2002. U.S. business inventories had hovered at $1.44 trillion for two years but are now at an all-time high.

Taken in a five-year trend, interest costs have fallen from $70 billion in 1999 to the current $17 billion reported for 2003.

Inventory levels need to be rethought to account for longer and variable lead times, says Wilson, and this could drive an increase in both cycle time and safety stocks. A study referred to in last year's State of Logistics Report indicated many vertical market segments had gained better control over raw material and work-in-process inventories, but finished goods did not enjoy some of the same positive trends. Asked about the inventory increase, Wilson confirms the majority of the problem remains in the finished goods segment.

Wilson says a rapid rise in inventories in late 2003 and early 2004 was a midyear reaction to a supply chain crunch. High demand allowed motor carriers to focus on more profitable freight and to push through rate increases, she notes. The lower-margin freight that many of the larger carriers shed in the process ended up on smaller carriers who also had an opportunity to push through their own rate increases.

Warehousing, another component of inventory carrying costs, will see significant increases in the coming year, according to Wilson. Changing sourcing and inventory management strategies are already influencing warehousing costs as companies look at staging inventory differently along their supply chains, Wilson points out. These effects will grow in the coming year.

The report also targets “shipper-related costs” for future increases. In this area, Wilson agrees that security costs and some of the impacts of hours-of-service rules will contribute to higher shipper costs. While declining to offer any estimates of that impact, Wilson did note that questions of who will bear which security costs and higher costs for accessorial charges related to hours of service pressures point to a need to dig deeper into shipper-related costs in the coming year. She points to estimates that it now costs from 5% to 15% more to move products than it did in 2002.

Though total logistics costs rose $26 billion in 2003, reaching $936 billion, those costs are lower as a percentage of total U.S. gross domestic product (GDP). At 8.5% of GDP, logistics costs declined for the third year, shedding 1.6 points since 2000.

Spending for inter-city motor carriage (for-hire and own-account) increased 5% in 2003, reaching $315 billion or 53% of total transportation costs. Local motor carriage also increased $5 billion to $167 billion, a 3% rise. The year saw fewer trucking failures than any year since 1999. The ability to hold onto most of the announced rate increases and to recoup rising fuel costs through fuel surcharges helped carriers cover increases in overall operating costs.

Railroads suffered from their inability to push through fuel surcharges and rate increases sufficient to cover rising costs — including wages, prices for materials and supplies and, in some instances, steel surcharges. Wilson says the rail industry acknowledged that it was unable to recoup some of its costs because the market would not accept increases based on current service levels.

Domestic water transportation continued a three-year decline, reaching $5 billion in 2003, down from $8 billion in 2000.

Globalization clearly had its effect on transportation costs. International ocean transportation remained strong at $21 billion and international air rose $1 billion to $8 billion, its highest level since 2000. Forwarding services continued to rise, reaching $10 billion.

Reports indicate that though warehousing costs have remained flat, a trend towards increased spending in this area was developing in late 2003 and could continue through 2004.

Over the 15 years of the State of Logistics Report, there has been little shift in the relative weights of each of the cost components it covers, says Wilson. Carrying costs represented 39% of total logistics costs in 1989 and presently account for 32%. Transportation costs have increased from 56% of the total to 63%.

On a dollar basis, the picture is quite different. Transportation costs in actual dollars have risen 75% in that time. So have shipper-related costs. Other costs increased by 60% during the period.

Wilson acknowledges that each year during the State of Logistics Report she and her predecessor, the late Bob Delaney, have observed, “The industry has reduced costs by managing inventories more efficiently, reducing warehousing expenses and minimizing risk.” While that strategy has been successful, Wilson raises the question, “Will the old strategies we applied so successfully work in our rapidly changing global environment? I think the evidence will show that to maintain the gains we have made and to improve our world competitiveness will require innovation and reengineering of supply chain management.” LT

July, 2004

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