Trends–July 2012
The 23rd Annual State of Logistics Report: Sputtering Toward Sustained Growth
The city was abuzz with speculation about the fall presidential election in June 2008 when Rosalyn Wilson, senior business analyst for Delcan Corp., gave her annual State of Logistics presentation in Washington, D.C. Stormy economic clouds were already gathering as a consequence of the housing bubble burst and subsequent credit crunch, adding extra gravitas to the November polling.
Wilson’s "Surviving the Slump" mantra offered brief glimmers of optimism amid a gloomy backdrop. The economy was still growing in 2007, albeit at a far slower pace, and total business logistics costs topped nearly $1.4 trillion, marking the fourth-consecutive year of record growth.
But that optimism swiftly turned. The rest, as they say, is history.
Fast forward to the present, and "The Long and Winding Recovery"—as Wilson titled her 2012 report co-sponsored by the Council of Supply Chain Management Professionals and Penske Logistics—provides a telling metaphor for how the United States is still enduring a slump that featured multiple humps and bumps. Now, headed into another presidential election season, the logistics industry is poised, if paused, as the economy sputters toward sustained growth.
In 2011, total logistics costs rose 6.6 percent to $1.28 trillion, still well below 2007’s high-water mark. Logistics costs as a percent of Gross Domestic Product (GDP) rose 2.6 percent to 8.5 percent. Still, if the U.S. Federal Reserve’s recent assessment is any indication, full economic recovery is at least three years away, says Wilson.
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The State Of Logistics 2012: For What It’s Worth (in $U.S. billions, except where noted) |
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Carrying Costs ($2.184 Trillion, All Business Inventory) |
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|
Interest |
$ 3 |
|
Taxes, Obsolescence, Depreciation, Insurance |
$ 294 |
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Warehousing |
$ 120 |
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Subtotal: |
$ 417 |
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Transportation Costs |
|
|
Motor Carriers: |
|
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$ 431 |
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$ 198 |
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Subtotal: |
$ 629 |
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Other Carriers: |
|
|
$ 68 |
International Domestic |
$ 28 $ 5 |
|
$ 10 |
International Domestic |
$ 16 $ 15 |
|
$ 35 |
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Subtotal: |
$ 177 |
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Shipper-Related Costs |
$ 10 |
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Logistics Administration |
$ 49 |
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TOTAL LOGISTICS COST
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$ 1,282 |
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SOURCE: 2012 State of Logistics report |
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While the failure of sustained economic growth is beginning to deteriorate recent gains in manufacturing and business spending—industrial production was up only 3.9 percent in 2011, much lower than the 6.3-percent rise in 2010—consumer goods output shows signs of recovery. Production was up 2.7 percent in 2011, compared to 0.8 percent in 2010. Consumers are buying again, with less discretion even, which offers promise for U.S. manufacturers and retailers.
"Several records were set in 2011," notes Wilson. "U.S. exports of manufactured goods reached a record $1.27 trillion in 2011, up 15.1 percent from 2010. One leading manufacturing sector was motor vehicles and parts, which grew 17.7 percent. Industrial supplies represented the largest goods export category with a record $499.5 billion worth of exports in 2011, followed by capital goods with $491.4 billion."
Rising inventories and plummeting interest rates—a result of this renewed optimism—led to increases in related costs such as insurance, depreciation, taxes, and obsolescence. Consequently, inventory carrying costs rose 7.6 percent during 2011.
Retailers Go Lean
Wilson cites one trend that began prior to the recession: the sophistication with which retailers are managing inventory—from demand-driven logistics to lean principles to vendor-managed inventory.
"Retailers have leaned their inventories, and now require suppliers to deliver only the product they need," she says. "As a result, retail inventories have been relatively stable, while wholesale and manufacturing inventories have increased.
"During most of 2011, manufacturing and wholesale sales and inventory levels were well-matched," she adds. "At the end of the year, however, when manufacturing was slowing and retailers were not restocking their shelves, stockpiles began rising."
More telling, the retail inventory-to-sales ratio (a measurement that compares inventory against sales for the same month) remained static—between 1.25 and 1.3 in 2011. In early 2009 it was 1.48, reflecting the dissonance between rising inventories and decreasing sales. While retailers have adjusted to demand variability, a flat retail inventory-to-sales ratio also indicates that manufacturers and wholesalers are holding more products farther upstream in the supply chain.
In terms of warehousing, excess capacity continues to drive rates down. Distribution center consolidation and better use of space—through technology and business process improvements—demonstrate that businesses are doing more with less.
A Tale of Four Modes
The U.S. transportation industry presents a more dynamic picture of where industry is headed. From afar, indicators show promise. Up close, they look distorted. Transportation costs increased 6.2 percent in 2011, largely a result of higher rates, not greater volume. Beneath the surface of the U.S. transportation system, old concerns are beginning to re-emerge.
"Air, water, and pipeline revenues declined in 2011, while railroad, truck, and forwarders experienced revenue growth," says Wilson. "For the first four months of 2011, volumes ranged from 11.4 to 13.8 percent above 2010 levels. Meanwhile, freight payments ranged from 27 to 35 percent higher than the previous year for the first seven months.
"The economy began to slow down significantly by the start of the third quarter, and the only signs of strength were earlier-than-normal shipments and inventory buildup in anticipation of the holidays in July," she notes. "Then, volume and total freight dollars paid dropped off."
Capacity speculation remains a common factor among all modes. The motor carrier base jettisoned assets during the recession through optimization and attrition. Having achieved a relative supply/demand balance, rates inevitably increased in 2011, and more recently in 2012—allowing carriers to regain revenue after a prolonged fallow period.
That said, trucking companies still face a litany of concerns—from driver recruitment, training, and retention, to fuel, insurance, and new government-mandated equipment costs. The U.S. Federal Motor Carrier Safety Administration’s CSA and Hours of Service regulations place pressure on the motor freight industry to qualify a shrinking driver pool. With freight demand expected to rise as the economy recovers, this further constrains over-the-road capacity investment and growth.
The Hours of Service regulations, which go into effect in July 2013, "will reduce the maximum number of hours a truck driver can work within one week from 82 to 70," says Wilson. "It will cause a three- to eight-percent loss of productivity for each driver."
Ocean freight is experiencing a different problem. Steamship lines have too much capacity, with new vessel orders outgrowing demand. In 2011, a peak season never emerged, forcing carriers to reduce rates.
"Lack of business and lower rates led several carriers in the transpacific trade to suspend some services during the slack winter months or leave a market entirely," says Wilson. "By late 2011, the number of idled containerships worldwide roughly doubled to 246, or four percent of global containership fleet capacity—about one- third of what we experienced at the height of the recession, when 12 percent of the fleet was idled."
Air cargo carriers bring more bad news. Revenue declined two percent in 2011. Over-capacity led to bad load factors, dropping domestic airfreight revenue ton-miles more than three percent. International airfreight was bolstered by a record $400 billion in export goods transported by air.
One positive transportation sector is rail. The cost for rail transportation jumped 15.3 percent, down from a 21.8-percent rise in 2010. Class I freight revenue per ton-mile continues to increase, up 12.9 percent, from 3.33 to 3.76 cents. Ton-miles, however, were up only 2.3 percent in 2011. Higher rates accounted for almost all of the increase in rail transportation costs.
As the threat of a truck capacity and driver shortfall weighs on shippers, intermodal transport remains a logical solution—and railroads are well-equipped to handle it. There were 15.2 million total carloads in 2011, a rise of 2.2 percent over 2010, while intermodal volume rose 5.4 percent, to 11.9 million containers and trailers. Railroad capital investment in equipment increased 91 percent during the same period.
Supply Chain Sustainability: From Wheat Fields to Walmart
If big-box retailer Walmart has its way, the next item on its ever-expanding green agenda is sustainable farming. As part of its broader initiative to reduce supply chain carbon emissions and serve as a model for corporate social responsibility, the company is sending employees into the fields to help farmers reduce their use of carbon-intensive fertilizer and improve logistics, according to Reuters.
Walmart has entertained similar ambitious ideas in other parts of the world where it operates. Its Direct Farm program in China, for example, has successfully engaged more than 750,000 local growers in an effort to connect farmland with supermarkets. The company expects this initiative will generate one-third of farm produce and cereals sold in Walmart China stores.
But the latest "grainstorm" may push Walmart into an entirely different sphere—agricultural innovator. The company’s objective is to move its Great Value-branded flour and wheat products from field to shelf more efficiently, using less carbon. In the process, it hopes to trigger transformative changes in the way U.S. farmers grow wheat, lowering costs and improving yields for a crop that has failed to keep pace with sustainability improvements in other commodity areas such as corn and cotton.
Among Walmart’s goals are some low-hanging fruit: convincing more farmers to abandon the practice of plowing fields after each harvest, and using satellite imagery to optimize fertilizer use. But there are challenges, too. Wheat is already one of the least-intensive crops in terms of nitrogen fertilizer, using half as much as corn to produce one acre of grain.
As it continues to buy more wheat to support its in-house brand, Walmart will flex its commercial muscle to bring changes to the agricultural landscape by getting farmers to adopt better techniques and label the flour it sells as a sustainable product.
Walmart is also evaluating opportunities to promote "precision farming," which uses satellite-guided planting to improve yields, and no-till methods that proponents say reduce soil erosion and maintain land quality. And, given its logistics pedigree, Walmart has also identified a potential backhaul commodity that can fill empty trucks in the South—manure from U.S. poultry producers that wheat farmers use as fertilizer.
Freight Demand Steadies, Capacity Concerns Surface
As the U.S. economy shows signs of consistent recovery, freight patterns are returning to some level of seasonal normalcy, according to Milwaukee-based financial services company Baird Equity Research. Demand trends solidified through May 2012 after exhibiting below-seasonal trends to start the month—reflective of a stable underlying freight environment.
Current supply/demand dynamics are tight, but have not yet driven up rates given the stable demand environment. Baird’s research indicates that shippers are aware of capacity tightness and driver supply issues, which will support rate growth as some seek to secure capacity. That said, rates will continue to trend at two to four percent growth without acceleration in demand.
On the cost side, diesel prices have fallen six percent since they peaked at $4.15 per gallon in early April 2012. Continued fuel moderation could provide a potential tailwind to truckers, easing cost pressures while improving consumer demand.
TMS Market Responds
The transportation management system (TMS) market has bounced back from the global economic downturn and is showing signs of renewed growth, according to Dedham, Mass.-based ARC Advisory Group’s annual report.
"One significant trend is the continued higher growth of the planning and execution segment compared to the fleet management segment," says Steve Banker, service director of supply chain management and principal author of ARC’s Transportation Management Systems Worldwide Outlook: Market Analysis and Forecast through 2016.
"In 2011, year-over-year growth in planning and execution was in double digits," Banker adds.
One implication is that companies are becoming more strategic in how they manage the transportation function within the supply chain (practicing demand-driven logistics, for example) and not just relying on better asset utilization and optimization efforts at the local level to reduce freight spend.
While North American revenues have returned, and ARC predicts robust growth into 2013 as pent-up demand drives the market, elsewhere the forecast is far less favorable. Europe’s expected slide into another recession will see TMS revenues shrink for the next two years. However, because North America is the most significant market for TMS, and demand is building in other regions of the world such as Latin America, growth will continue in spite of Europe’s travails.
Supply Chain Excellence to the Core?
Apple may rank as the number-one supply chain in the world—five years running, according to Gartner’s annual Supply Chain Top 25—but not all analysts share that opinion. Take, for example, Steve Banker, ARC Advisory Group’s service director of supply chain management.
Banker contends that Apple’s excellence lies in innovation and product development, which shouldn’t be confused with supply chain management. In a recent blog posting, The Apple Supply Chain: Best in the World?, Banker details the dynamics that make the company’s supply chain "fascinating."
On the plus side, Apple controls its own demand. "As long as it underestimates demand for a hot new product, it will have loyal customers clamoring for the new devices and willing to wait," says Banker. The company also has procurement and pricing leverage, buying up components—and sometimes the machines that make those components—while freezing out competitors.
On the downside, Apple’s product launches require a great deal of complexity and secrecy, as well as a flurry of production activity in the lead-up to a deadline. This places a great deal of stress on overworked factories—and ultimately the company’s reputation.
"While the existing customer base has largely ignored labor relations problems, the demographic of the people that buy Apple products indicates a concern for social responsibility," says Banker. "Further, the Chinese market is becoming very important to Apple, and closer scrutiny by the Chinese government could affect shipments."
The reality is that Apple’s supply chain is predicated by product innovation and expedited time-to-market expectations, making it vulnerable to exceptions that could threaten parts availability and, even worse, system failure.
"Apple’s new CEO, Tim Cook, is a supply chain guy with a strong reputation. He is working to improve the company’s reputation for social responsibility," says Banker. "But if I were Apple, I’d rather have another product development guru like Steve Jobs. To drive continued growth and margins, the company needs to continue to excel at product development, but only needs to be competent in supply chain management. Unfortunately, there are not many Steve Jobs out there."
WSDOT Weighs in on Trucking Efficiency
In an effort to keep truck drivers moving, especially as Hours of Service and driver availability become increasingly constrained, the Washington State Department of Transportation (WSDOT) is leveraging technology so that commercial vehicles can bypass weigh stations.
The Commercial Vehicle Information Systems and Networks (CVISN) enabled more than 1.1 million vehicles to circumvent weigh stations in 2011, while decreasing travel times by an estimated 98,000 hours. The system uses weigh-in-motion scales, transponders, and automatic license plate recognition to screen trucks as they approach. With typical weigh station stops taking about five minutes—at an estimated cost of $10.28 for time and fuel—CVISN saved truckers almost $12.1 million in 2011, according to Washington state officials.
"In the grand scheme of commercial trucking, time really is money," says Anne Ford, WSDOT commercial vehicle services administrator.
WSDOT estimates that 39 percent of all commercial vehicles driven in the state last year used CVISN transponders, an increase of 9.4 percent since 2008 and 3.7 percent since 2010. Over the past four years, the system saved freight haulers $51 million and reduced previous delays at weigh stations by approximately 414,000 hours, officials estimate.
"CVISN is extremely efficient and aimed specifically at keeping freight moving along our state’s highways," Ford adds.
Multi-channel Retailing Triggers Distribution Shift
Jones Lang LaSalle’s report, Retail 3.0: The Evolution of Multi-channel Retail Distribution, demonstrates how e-commerce and m-commerce (mobile) channels are revolutionizing the retail sector. Nearly 80 percent of retailers report online sales have increased in the past five years; some report spikes of 25 percent or more. The "store" is now everywhere—in consumers’ pockets, at their homes, and at the mall—which is forcing shippers to adapt their traditional distribution center space needs and networks (see chart).
"With multi-channel selling comes a major focus on distribution—how to get from ship to shore to store or your door as quickly and efficiently as possible," says Kris Bjorson, head of Jones Lang LaSalle’s Retail/e-Commerce Distribution Group.
Traditional warehouses that support stores require less investment and machinery, and fewer staff. The new direct-order fulfillment DC can cost three times as much, and involve three times as many employees, placing greater emphasis on site selection.
"Considering proximity to key customers, tax incentives, sales tax, and the availability of local labor is vital to retailers when searching for the right location for their e-commerce distribution centers," adds Bjorson.
The inability of some domestic logistics service providers to fulfill high volumes of parcel shipping at low costs and within a reasonable delivery window, however, dramatically impacts the direct-to-customer channel. Retailers have to establish their own distribution networks or rely on outsourcing.
How have your distribution center space needs changed in the past 5 years?
(Source: Jones Lang LaSalle & National Real Estate Investor online survey, April 2012)