The Last Mile: Shippers face a trillion-dollar challenge

July 1, 2004
Shippers face a trillion-dollar challenge If you want to impress your friends, drop this number on them: $1,493,000,000,000. No, it's not Bill Gates'

Shippers face a trillion-dollar challenge

If you want to impress your friends, drop this number on them: $1,493,000,000,000. No, it's not Bill Gates' net worth — it's the value of U.S. business inventories in 2003. You played an important role in moving and managing those inventories. More importantly, you were the last line of defense on the costs your company incurred to produce and deliver product to your end customer.

We've used the Rodney Dangerfield line, “I don't get no respect” before, but it's time we adopted the BASF marketing approach. Try this on for size: “We don't make the product — we make it affordable.”

That's bound to raise some questions. How can you claim to have so much impact on a product and its final delivered cost? Let's put on our forensics hats and dust any given carton for fingerprints. How many times was that carton touched, moved, stored, transported from origin to the final customer?

Let's go a step further and deconstruct the product and follow its components back to their origin. Have we arrived at raw ores in the ground yet? If not, keep going. How many touch points did you come up with? My bet is the number will begin to resemble the one in the first paragraph pretty quickly.

Though logistics costs have continued to rise in some areas, logisticians have managed components of logistics and physical distribution very well. Witness the current $936 billion bill for logistics services. Though the bill for logistics rose nearly 3% in 2003, logistics costs as a percentage of gross domestic product (GDP) fell to an all-time low of 8.5%. Taken another way, logistics reduced its portion of the cost of goods sold (COGS to your accounting department).

It's true that interest rates remained at unprecedented lows for nearly a year, helping to offset a $15 billion rise in for-hire inter-city motor carriage and various other transportation cost rises that took the total transportation bill to $593 billion — 63% of total logistics costs. However, logistics professionals met the challenge of increased transportation costs, rising security costs and lengthening supply chains to keep it all under control.

Some of the toughest challenges are ahead. Tighter capacity is driving transportation costs higher still in all surface modes. Interest rates are about to start moving upward. And the peak shipping season is yet to come. To end the year on a positive note, you'll have to pull out all of your skill and apply it diligently to managing the flow of goods through the end of the year.

In the longer term, warehousing costs will rise as changing supply chains necessitate reconfiguration of your distribution network. And the toughest challenge will be connecting demand and supply in a more timely manner that improves response. The first hurdle will be getting timely data from demand points. The real logistics magic will be when you can turn the supply on and off without producing waste.

Keep in mind — some of the transit times you'll be dealing with stretch from 14 to 21 days by sea. If you want to respond and keep costs down, you can't just shift to air.

You should already be digging deep to find an effective logistics strategy to support the supply lines your manufacturing and procurement divisions have established. They will only remain the cost-effective solutions they were intended to be if you can control the logistics costs. Some of those costs are going up, and you can't stop them. You'll have to get everyone onboard and looking at total delivered cost, or we'll all be Rodney Dangerfields again.

Perry A. Trunick
executive editor

July, 2004

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