US Logistics Costs Rise in 2007

July 10, 2008
Rosalyn Wilson's State of Logistics Report presentation highlights cost trends in US logistics.

US business logistics costs hit $1.4 trillion in 2007, up $91 billion over the prior year, according to Rosalyn Wilson. Wilson reported the figures in the 19th Annual State of Logistics Report, sponsored by the Council of Supply Chain Management Professionals.

The 2007 results were the fourth consecutive record high for US business logistics costs, pushing logistics costs to 10.1% of the gross domestic product (GDP)—a figure equal to 1998 and only topped once since then when US logistics costs hit 10.3% of GDP in 2000.

With the US economy slowing, demand for transport services also tapered. But despite the effects of the housing slump and slower consumer buying, export demand increased, shoring up freight volumes in some areas. That said, nearly 2,000 motor carriers ceased operations in the course of the year.

Looking more specifically at the modes, motor carrier tonnage rose earlier in the year but dropped in the latter months, says Wilson. Rail ton-miles were up 2.2% into 2008, but intermodal traffic declined 3.1%.

Fuel prices and inflation have also continued to rise as have inventory levels, reports Wilson. Real GDP was up just 1.7% in the first quarter of 2008, falling after a lackluster 2.5% increase in the fourth quarter of 2007. Expectations for 2008 center on a 2.4% rise in GDP for the full year.

With six months left in 2008 at the time of the report, Wilson noted, “The Federal Reserve continues to say that we have not entered a recession, but in my opinion, neither have we entered a recovery.” She expects “more of the same” for 2008 and a slow recovery in 2009.

When the US economy does bounce back, what can the logistics community expect? “Poor industry performance is leading to a loss in capacity as [transport] companies first idle and then sell off their excess equipment or leave the market altogether,” Wilson points out. “Adding to this is a drop in investment in plant and equipment as companies put off spending.” This lower capacity level will have serious repercussions when the economy turns around, she suggests. This could return the market to a crisis situation similar to that experienced just a few years ago with backlogs and bottlenecks.

Inventories will become a major concern for the field as the focus on inventory optimization takes center stage. Wilson points out that wholesale inventories have been growing faster than retail inventories as turnover rates have been falling.

Total logistics costs have gone up in each of the last five years, says Wilson, rising 52.3%. Transport costs accounted for 52% of the rise in 2007. Motor carriage, the largest component of transport costs, posted a 5.6% increase and other modes, taken together, accounted for a 6.7% rise. Though a smaller portion of overall logistics costs, inventory carrying costs have been rising faster than transport costs for the last four years, notes Wilson.

Warehousing costs also rose in 2007, up 9.9%. The move to more regionalized distribution centers continued as more firms relocated facilities or opened new distribution centers serving smaller markets. These changes were made to shorten delivery times and length of haul in order to reduce fuel usage, says Wilson. The switch from more palletized deliveries to individually picked items pushed warehouses to look for more automation, observes Wilson. Labor shortages are also becoming a problem as it is harder to recruit workers at lower-wage jobs.

Worker pay has also been an issue for the transport side, but from a different angle. Shorter length of haul and less cargo means many transport workers have seen their income erode. Driver miles are down for many, as are dock worker hours. “Looking at the annual reports of many carriers will show that hourly compensation is up in terms of wage rates and benefits,” says Wilson, “but the total hours for which they pay the compensation was down in 2007.”

From consumers to the board rooms of major companies, fuel is a hot topic of conversation. For the logistics industry, it’s an unavoidable issue. “It costs over $1,100 to fill up a big rig with a pair of tanks that hold 250 gallons,” says Wilson. “This compares with $720 last year.” Fuel has now passed labor to become the motor carrier’s top cost. It is eroding profit margins in an industry with historically lean margins to start with, continues Wilson. Smaller motor carriers are finding it difficult to survive with fuel costs at this level because they often cannot pass the full increase in fuel costs along to their customers in the form of fuel surcharges. Meanwhile, these smaller companies also cannot take full advantage of the economies of scale available to larger companies to reduce empty miles. As an example, Wilson notes motor carrier C.R. England estimates 96% of every revenue dollar goes to costs, up from 92.8% in 2007 and 90.8% in 2006.

Air freight carriers are also reporting that their prices are rising faster than rates they charge to cover them. “Northwest Airlines has modified its fuel surcharge over 20 times this year, cut service to some markets and grounded aircraft in response to higher fuel costs,” says Wilson. UPS, says Wilson, has also noticed a shift away from its faster air cargo options to slower, less expensive ground options.

The nation’s 71st largest for-hire motor carrier shut its doors because of fuel costs, says Wilson. And, nine air carriers have announced they are ceasing operations primarily due to higher fuel prices.

For comparison, barges can transport a ton of freight 576 miles on a single gallon of fuel. Railroads can carry a ton of freight 413 miles. And a motor carrier can transport one ton of freight 155 miles. (70% of US freight moves by truck.)

The driver shortage has been masked by the economic slowdown in 2007, reports Wilson. The parallel slowdown in the construction industry has had a positive effect for motor carriers as laid off construction workers have turned to driving trucks.

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