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Special Report: The State of Logistics in the U.S.

Aug. 7, 2012
With growth not yet on the horizon, shippers are shifting their modal strategies to keep their costs as low as possible.

The economic recovery will continue to sputter along weakly for the next three years. If you secure trucking services on a transactional basis you can be assured that sometime soon you will not be able to get a truck. In the face of tightening trucking capacity, rail intermodal is seeing a massive resurgence. Shippers are turning more to warehouse-based third-party logistics providers (3PLs) to provide intermodal and other logistics management expertise previously associated with non-asset-based 3PLs.

These are some of the conclusions of the 2012 State of Logistics report sponsored by the Council of Supply Chain Management Professionals and Penske Logistics, and presented at a recent press conference in Washington, D.C. As it has for the past 23 years, CSCMP offers statistical data and in-depth research to tell the story of what has happened over the previous year, and what is expected to take place over the next. The analysis as usual was provided by Rosalyn Wilson, a senior business analyst with Delcan, along with a panel of shipper, 3PL, ocean, air and rail carrier executives.

Those of you who have been keeping a weathered eye on the peregrinating prognostications about economic growth won’t be terribly surprised to learn that the general assessment of Wilson and the panel members is that the economy is displaying almost as much evidence of stagnation as it is of progress. This can be immediately seen in the anemic gross domestic product growth of 1.7% in 2011, well below the 2.8% growth of 2010.

Current projections are for 1.9% GDP growth for this year, and the economy is not expected to get back to its pre-recession levels of economic growth and general prosperity for at least another three years.

Unfortunately, although consumer spending drives the U.S. economy, consumers have been reluctant to spend and most of the growth has been fueled by manufacturing and business spending. The bad news is that spending is even weaker this year, and the signs are that with a few notable exceptions like the automotive market, fearful consumers prefer to save rather than spend because they fear that a new recession is just around the corner.

In addition, last year’s robust export picture, up 14.5% to $210 trillion, is seeing a major slowdown this year in the face of a strengthening U.S. dollar and a worsening global economy, especially in Europe and Asia.

Thus we have a recovery that can be measured by its fits and starts. “We’re on our way up, by which I mean that we’re not on an elevator, we’re taking the stairs,” Wilson says. “We’ve gone from taking two steps forward and one step back, to taking two steps forward and one-half a step back.”

Higher Inventories, Higher Costs

Logistics costs in general and transportation and inventory carrying costs in particular rose last year. U.S. business logistics costs rose 6.6%, $79 billion, in 2011, and logistics costs as a percentage of GDP were up 2.6% to reach 8.5%, or $1.28 trillion.

Transportation costs rose 6.2% largely because of higher rates in the face of shrinking trucking capacity, not due to increased traffic volume.

Inventory carrying costs were up 7.6% because of higher inventories that were built up in anticipation of consumer spending that failed to materialize. However, retail inventories have remained relatively stable because retailers have learned to push down their inventory carrying costs to their suppliers. As a result, most of the increase came from rises in wholesale and manufacturing inventories.

Higher inventories, of course, lead to higher related costs in insurance, depreciation, taxes and obsolescence. If it hadn’t been for continuing low interest rates, that number would have been much higher, Wilson says. She points out that had we seen the same interest rates we had in 2005, we would have almost doubled the 2011 inventory carrying cost.

Warehousing costs also went up 7.6%. Although excess capacity in warehouse space had driven down rates over the last several years, increasing inventories have filled that space and rates have risen. The question for the future is how much higher inventories will grow because of weaker consumer spending, slowing exports and companies building up stock in anticipation of possible labor actions at the ports.

The State of Logistics report notes that the warehousing industry’s improving fortunes also can be tied to two things: improving the product management within warehouses, and the processes used to work with the carriers serving them, both stemming from the adoption of new software and equipment to improve efficiency and maximize throughput.

In addition, savvy warehouse operators have expanded their service menus beyond traditional packaging and handling related tasks, including services previously seen as the province of non-asset-based 3PLs. These include sophisticated distribution planning, routing and transportation management services, including developing and supplying transportation monitoring software.

Trucking Capacity Could Get Even Tighter

These services are becoming even more vital for warehouse customers as trucking capacity tightens severely because of a perfect storm of converging factors: fewer carriers in the market, a very real and worsening driver shortage and government regulations like the Compliance, Safety and Accountability (CSA) program, which has thinned the ranks of carriers considered acceptable by shippers, and new hours-of-service regulations, which could reduce productivity and force the redesign of distribution networks throughout the country when they go into effect in 2013.

Two major shipper executives on the State of Logistics panel—Rick Sather, vice president, customer supply chain North America, for Kimberly Clark, and Rick Jackson, executive vice president of Mast Global Logistics, the logistics subsidiary of Limited Brands—both say they have already seen trucking service failures spreading throughout the Northeast and Southeast.

“If you are approaching trucking as a transactional business, you should take another look,” Sather advises.

Responding to tightening trucking capacity, shippers are turning to dedicated contract carriage and rail intermodal as alternatives. Joe Gallick, another panel member and senior vice president of sales for Penske Logistics, says his company has seen a marked upswing in inquiries about dedicated contract carriage from companies who are considering outsourcing their private fleets.

Even warehouse-based 3PLs that don’t offer a full menu of contract carriage services like Penske’s can help. Many of them operate their own fleets and have long-standing relationships with established for-hire carriers to eliminate this worry for their customers. “More companies are looking to 3PLs to help them meet these challenges,” Gallick says. “You will need the ability to shift among mini modes, including considering private carriage, dedicated contract carriage and truckload.”

Transloading Offers an Alternative

Both Sather and Mast say their companies also are turning to rail intermodal, and have been sufficiently impressed by improved service and responsiveness to customer needs shown by the railroads. Another panel member, John Lanigan, executive vice president and chief marketing officer for BNSF Railway, says his company has seen a double-digit rise in intermodal traffic over the previous 12 months.

For the first 25 weeks of 2012, rail intermodal traffic overall rose 3.2% while at the same time carload traffic fell 2.9%, according to the Association of American Railroads.

This is an area where 3PL warehouses can help. Many of them have had years of experience with transloading— the practice of moving freight from one container to another to make the most effective use of intermodal options. Typically this has been done for higher value freight that is capable of being transferred easily from one container to another and that can be transported by rail over longer linehauls. But railroads and their warehouse partners are developing new ways to move this freight more efficiently over shorter distances, offering shippers single-rate solutions below the traditional 600-mile cutoff for being a cost-effective service alternative.

Gary Minardi, president of San Jose Distribution Services Inc., has extensive experience with transloading, and notes its flexibility also makes it more attractive. “Transload services could include cross-dock operations, hold in warehouse and delivery just-in-time, unload, label and ship direct to retail, local plant support and intermodal yard pools that can encompass both warehousing services and outbound loading,” he says.

Minardi points out that some 3PLs offer both intermodal and rail siding options in most major markets, adding that the United States is built around the railroad infrastructure. “Intermodal to warehouse, warehouse to regional distribution is more efficient and more cost effective than traditional line haul replenishment,” he says.

Another 3PL with extensive experience in transloading is Lansdale Warehouse Company. W. Paul Delp, president of the company, says that railroads need to step up to the plate and work in collaboration with their warehouse 3PL partners to help this market grow into its full potential.

“Overcoming demurrage and lingering service issues with the railroads will be the keys to success,” he says. “In addition, both the railroads and warehouse operators need to employ properly-designed marketing to attract more customers to take the step of allowing their cargo to undergo more extensive handling and mitigating the service problems typically associated with any railroad service.”

Joel Anderson is president of the International Warehouse Logistics Association ( and a member of MH&L’s Editorial Advisory Board.

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