The good news of overall reductions in logistics costs as a percentage of gross domestic product masks some of the challenges that continue to face logistics professionals. Reporting that those costs fell for the third year in a row, to 8.5% of GDP, Roz Wilson offered a different expectation for 2004 when she presented her update on the earlier report at a session at the Council of Logistics Management’s annual conference.
Driving change is the growth of what Wilson calls “transition economies.” China and Eastern European nations are among those reporting growth in merchandise trade above 10% per year. This translates into a 7.5% growth in world trade, and that is fuelling part of the 5% to 15% increase in the cost of moving goods.
Increased and variable lead times will force a rethinking of inventory positions, Wilson pointed out. Inventories rose 4% in the first half of 2004. Though warehouse costs were flat when Wilson issued the State of Logistics Report, she said that vacancy rates are down and spending is increasing. The effect of interest rate increases has not yet become apparent, but will definitely have an impact when 2004 figures are compiled.
Coupled with the already evident increases in transportation costs, 2004 could end on a less positive note relative to logistics costs. Truck rates were up 5% as motor carriers have been able to recover operating cost increases and fuel surcharges from shippers. The $2 per gallon diesel price is up 40% over the same period in 2003, says Wilson. Loading and unloading costs and other shipper related costs are also increasing, due in part to hours of service regulations that forced carriers to push shippers and consignees on demurrage, detention and delay costs.
Despite capacity issues on the railroads, the rail outlook for the remainder of 2004 looks pretty much the same as 2003 relative to cost. Rails have been less able to push cost increases through to shippers and consignees than their motor carrier counterparts.
Ocean shipping rates, which saw a 40% increase from 2002 to 2003, could see another 20% rise in 2004.
The bottom line: Trucking prices are up, fuel surcharges are up, capacity on the West Coast in all modes is constrained, interest rates went from 1.1% to 1.7% and are likely to continue to rise, inventories have been growing, warehouse vacancy rates are dropping, pushing prices higher. Though shippers and 3PLs complain about security costs, they haven’t shown up as cost pass throughs or surcharges. And the 40%, 50% and even 60% increases in insurance premiums are not being passed through.
The State of Logistics Report is an annual report providing bottom-line dollar values for logistics spending. Wilson notes the Council of Logistics Management will soon launch a quarterly cost index which will serve as a business tool to monitor trends in the industry. The index will provide comparisons back to 2000.