Logistics Costs Over 10 Percent of GDP Last Year. What Does it Mean for Carriers?

Implications:   The annual State of Logistics Report issued by the Council of Supply Chain Management Professionals shows that businesses spent a record $1.4 trillion on logistics last year. That's equal to 10.1 percent of Gross Domestic Product. It's the first time since 2000 that figure has exceeded 10 percent.   Not surprisingly, most of the increases were related to fuel. But that hardly means carriers in most modes were getting rich. Except for railroads (which posted their second-best year in history), most modes were barely making it. The increases in their revenues were, in most cases, eaten away by huge spikes in fuel costs.   Still, pricing is totally in the hands of shippers right now. The question is, how long can that last?

Analysis:   The release of the annual State of Logistics report to logisticians and others in the supply chain and transportation industries is like what opening day of the baseball season is to baseball fans.
  It's a starting-off point, a way to compare this season to past years, and it gives a glimpse of what may lie ahead.
  The report, issued by consultant Rosalyn Wilson (who is carrying on the work started by the late Bob Delaney of Cass Logistics, who invented this report) is credible, timely and highly accurate. It also provides data as far back as 1985 so one can gain a historical perspective of where we are in this point of time.
  Where we are is in trouble. The report is a depressing compilation of sour statistics, bad trends and perhaps even a darker future. While transport costs rose 5.9 percent last year, inventory carrying costs even outpaced those costs, rising by 9 percent.
  Transportation costs now account for 6.2 percent of nominal GDP. But that doesn't mean the carriers are flush these days. Quite the contrary. Traffic volumes are down for most modes, though revenues were preserved by fuel surcharges.
  But capacity is permanently leaving the trucking industry as firms exit the market place and sell their equipment, often in foreign markets. The recent closing of Jevic Transportation, the nation's 71st-largest trucking company, is evidence that some truckers simply do not have adequate business plans in an era of $135-a-barrel crude oil.
  But shippers are hurting as well. Inventory carrying costs as a percentage of GDP had declined about 26 percent over the past 20 years. Carrying costs have risen every year for the last four years, eroding some of that gain.
  More importantly, transportation costs as a percentage of GDP is just about the level it was 20 years ago. That logistics costs as a percentage of GDP crossed the 10 percent threshold last year for the first time in seven years is indicative of how tough the market is right now.
  "One of the realities of a global supply chain is that delivering the goods now costs more," Wilson said.
  But still, the pricing pendulum has swung heavily toward the shipper, Wilson rightly contends.
  "Heightened competition for fewer loads has severely constrained rates, particularly in the trucking segment," Wilson said. "Pricing power is firmly in the hands of shippers now, not the carriers."
  Wilson does not believe the country is on its way out of its economic downturn. While the Federal Reserve adamantly refuses to call the current condition a recession, as Wilson says, "Neither have we entered a recovery."
  She expects more of the same for the remainder of this year and then only a "very slow recovery" into 2009.
  That would make this current downturn a three-year freight recession, one of the longest of the past 30 years. As employees and customers of Jevic have found out, that's too long for survival of some of these companies.
  There will be more bankruptcies and cessations coming, especially in the trucking sector. The only question is who's next, and who will most benefit.