June 17, 2009: Against a monumental D.C. cityscape shrouded in gray, this year's 20th-annual State of Logistics Report sponsored by the Council of Supply Chain Management Professionals felt the full rush of a blurring economic cloud, as industry awaits the next turn toward recovery. Spinning off last year's "Surviving the Slump" report, author and analyst Rosalyn Wilson engaged attendees at the National Press Club with her "Riding Out the Recession" addendum—suggesting little has changed in the past year except perception.
In 2008, the full import of a global economic crisis was just beginning to manifest. This year, there was nowhere for it to hide. Consequently, many companies battened down the hatches, shed assets, and retracted operations while waiting for the doldrums to part. Others, however, are thinking more proactively, trimming their supply chains, tacking their networks, and challenging the familiar by exploring new tactics and strategies.
Grounded in gridlock between Washington's Union Station and the National Press Club, my taxi driver raised a thoughtful point while deftly arcing his own path through a cacophonous tangle of traffic. "Why can't trucks make their deliveries at night?"
It's a question asked a few years too late, or perhaps before its time. It's also a telling reminder of where U.S. industry has been, where it is now, and where it's going; of how companies are learning from the past and reacting to the present, while strategically thinking about the future. Capacity constraints, congestion, and Hours-of-Service complications are fleeting memories as shippers and service providers instead grapple with fewer shipments, fewer assets, and greater pressure to reduce costs. Nostalgia for bumper-to-bumper traffic might even be welcome if the business was there to show for it.
But those companies asking questions and seeking answers beyond the present will match any trifling taxicab obsession. For good reason: The current condition isn't worth dwelling on if you're not looking, and moving, forward.
Economy in Retreat
The U.S. economy grew at an average rate of only 1.13 percent in 2008, compared with 2.2 percent the year before, but not quite falling to the low growth rates during the 2001 recession.
Slack consumer spending contributed to a seven-month slide in retail sales through the end of 2008. Meanwhile, U.S. industrial production fell 7.8 percent in 2008, and the first quarter 2009 is down 20 percent year-over-year. New orders have contracted for 13 consecutive months, reflecting the lowest level on record going back to January 1948, according to data from the Institute for Supply Management.
As a result, the U.S. unemployment rate rose to a 25-year peak of 8.5 percent in 2008—with speculation that it could hit 11 percent by year-end 2009—bringing the 2008 total unemployed to a six-decade high of 2.4 million.
Wilson's sobering assessment of macro economic trends shaded her analysis of the U.S. logistics system.
The cost of the U.S. business logistics system declined 3.5 percent in 2008, the first drop in six years. Business logistics costs fell to $1.3 trillion, a decrease of $49 billion over 2007, but were still the second highest on record. After surpassing the 10-percent threshold in 2007, logistics costs decreased from 10.1 to 9.4 percent of the nominal Gross Domestic Product in 2008.
In terms of transportation costs, Wilson reported a near two-percent increase in 2008, compared to six-percent growth the year before. Trucking, the largest component of transportation, rose only 1.3 percent. A drop in fuel prices later in the year meant fewer fuel surcharges, which had been one of the major contributors to revenue gains in recent years, said Wilson. This profit dip was accentuated by a swift retreat in freight flows.
"Shippers are moving an estimated 25 percent to 30 percent less freight nationwide today compared with one year ago," she added.
As freight demand drops faster than capacity, many trucking companies and asset-based service providers have been forced to jettison their fleets—a reality that continues to raise concerns about a dearth of capacity when the economy eventually rebounds.
Inside the warehouse, news is equally grim. Inventory is stacking up, carrying costs are rising, and turns are decelerating. Many warehouses are expanding their value-added logistics offerings and, where possible, investing in more efficient materials handling equipment and systems to offset lost revenue, Wilson noted.
What's more telling, demand for warehouse space has expectedly followed the freight demand curve, with businesses consolidating as much as possible and tabling unnecessary facility expansions or outsourcing efforts—which counter any investment in value-added services.
"By year end, vacancy rates were rising and rates were declining for the first time in more than three years," observed Wilson. "Many warehousing companies are reporting a drop-off in the ancillary services they provide as merchandise languishes on the shelf."
Less Inventory: A Model for Efficiency
The greatest bellwether for the current state of logistics is that supply chain inventories have declined while inventory-to-sales ratios have spiked.
All business inventories rose for the first half of 2008, then plunged in the second half of the year. But businesses were still unable to liquidate product at a pace that matched the drop-off in sales.
"The increase of inventory/sales ratios has occurred across the entire distribution chain—wholesale, manufacturing, and retail levels," Wilson said. "Retailers and manufacturers are finding it difficult to draw down their inventories to match sales, and that trend will be a persistent problem well into 2009."
Such a precipitous drop in consumer demand, retail sales, and manufacturing output has placed a burden on supply chains, internally and externally, among service providers and shippers. The short-term ramifications of inventory contraction are reshaping how businesses address and approach supply chain management for the long haul.
Inventory reductions create opportunities, noted Charles DeLutis, vice president field sales for LTL trucker YRC, Overland Park, Kansas, one of several panel experts invited to answer questions following Wilson's presentation. "Inventory reduction means greater interest in near shoring; moving smaller, more frequent quantities of shipments; and demand for speed and precision. Supply chain strategies are changing month-to-month, week-to-week, and every day," he said.
From a warehousing perspective, leaner supply chains are forcing businesses to become more strategic in how they utilize space and assets.
"Leaner inventories mean excess warehouse capacity. Less capacity translates to more cross-dock activity," observed Cliff Otto, president of Saddle Creek, a full-service warehousing and logistics company based in Lakeland, Fla. "There will definitely be an impact on commercial real estate development."
Some shippers see current business sluggishness as an opportunity to tighten supply chains even further, using less inventory as a model for becoming more efficient and demand-driven.
"Inventory reductions will stick because we're becoming a far more efficient supply chain," added Paul Avampato, vice president, process design catalyst for Kraft Foods North America. "New relationships with vendors and customers drive out costs that will sustain after the recession."
John Lebowitz, director of global trade for Dell, shared that opinion. "Inventory is not a good word inside Dell. We've become more of a supply chain company than a manufacturer, reducing inventory and increasing speed. We don't see inventory growing," he said.
But even as shippers and service providers relish the challenge of leaning out their supply chains and becoming more responsive to demand, enhancing visibility and increasing turns requires complete synergy between all transportation and distribution touchpoints.
For example, an increase in warehouse cross-dock activities places greater importance on expediting asset turns to match inventory flows. As domestic transportation costs wax and wane according to fuel price fluctuations, congestion issues, and process efficiency, companies are depending on transportation modes to keep up to speed.
"More crossdocking means more LTL. Having more distribution nodes than we've ever had in the past means shorter moves," added Otto.
As intermodal grows in importance, in part due to fluctuating transportation costs and the looming specter of a capacity shortage, U.S. railroads are upping the ante to meet growing velocity requirements.
"We're making intermodal faster and more efficient, approaching over-the-road levels of service," said John Lanigan, executive vice president and chief marketing officer at Burlington Northern Santa Fe. "We're collaborating more with trucking companies."
Increasing collaboration and competition between railroads and motor freight carriers will increase velocity and service. BNSF, by example, is experimenting with a Houston-to-Dallas service run, a traditional trucking leg, where it thinks it can be competitive, noted Lanigan.
For shippers such as global retailer Limited Brands, the promise of leveraging a faster intermodal system has huge dividends. "Our business is reenergized around the concept of speed. We're rethinking speed, getting goods to stores when customers want them," said Rick Jackson, executive vice president, Limited Logistics Services, Limited Brands.
"This concept requires internal process improvement because speed for speed's sake doesn't work," he added. "We're looking at using intermodal for less time-sensitive inbound shipments to the distribution center, then using truck to the stores for more time-sensitive movements."
Bad Times, Good Time to Strategize
Given the limitations of the current marketplace, businesses are leveraging external stasis to drive internal action. There's no time like the present to start thinking about the future.
"The time is ripe for redesigning business processes," Avampato observed. "We're trying to optimize silos within Kraft Foods. A significant portion of the business is repetitive, so if you look at the steady state, you can begin to optimize."
Visibility remains the Holy Grail for supply chain practitioners as they explore better ways to aggregate and communicate information across the supply chain and leverage actionable information as a competitive enabler.
"Dell is looking to capture visibility earlier in the supply chain," said Lebowitz. "With reverse logistics we often don't see what we see until we get it, so we're trying to increase visibility from retailers."
Beyond technology, businesses are getting back to basics as they fine-tune transportation and logistics processes.
"Sticking to the fundamentals and getting business processes in line are important in good times and bad. We want to create value for consumers, and drive out supply chain costs in the short and long term," added Avampato.
For trucking companies such as YRC, it's a matter of staying proactive even as the marketplace forces companies to retract and react.
"The current economic situation has forced us to be reactive," noted DeLutis. "We're counter-punching because we're not sure where the next punch is coming from—the economy, consumer demand, the automotive sector, a pandemic. Making a transition from reactive to proactive means learning from your reactions: integrating networks, getting to know customers better."
Valued partnerships will be a critical success factor when the economy turns, Wilson observed. "There will be lower consumer spending for a while as disposable income and credit remain static. Now is the time to take advantage of this respite and build up. When we rebound in 2010 there will be an immediate trucking capacity shortage," she said.
To anticipate that transportation capacity, companies need to start working on their relationships with carriers and vendors, planning for and securing capacity now.
"Focus on what you can control," advised Jackson. "We're looking internally and challenging sacred cows and paradigms. We're taking people from one functional area to look at other functional areas."
Perhaps there's a lesson to be learned from an opinionated taxi driver stuck in the day-to-day fray. Questioning the status quo, while pressing forward and eschewing idle speculation, is a positive way to re-imagine the supply chain and lay a blueprint for future growth and success.
The alternative? Honk your horn and wait for others to move first.
The State Of Logistics: 2009 Trends By Mode
Airfreight revenue declined 2.4 percent in 2008 and volume was down 9.4 percent from the year before, according to Rosalyn Wilson. High fuel prices, conflated by a global drop in air cargo shipments, caused airfreight carriers to post losses of more than $4 billion. Companies responded by idling and downsizing planes and rationalizing passenger/combi and all-cargo services, reducing capacity by about 10 percent.
Costs for the maritime and domestic water sector rose 2.6 percent as ton miles carried dropped again in 2008. Traffic through the nation's ports contracted by 2.6 percent in 2008. "The three major East Coast ports posted gains in TEUs, while all the other top 10 ports lost traffic," reported Wilson. "The West Coast ports, particularly LA/Long Beach, are seeing what may actually be a permanent reduction in traffic levels." The one bright spot for U.S. maritime trade: Smaller ports are making great waves investing in and expanding infrastructure and services to capture market share.
The truckload industry continues to face unprecedented challenges as freight volumes remain low and over-capacity threatens profitability. No less important, trucking companies are facing increasing competition from U.S. railroads. During 2008, more than 3,000 companies went belly-up, removing seven percent of the nation's capacity, according to Wilson. "Less-than-truckload companies, those that consolidate freight shipments at numerous terminals, have 20 percent excess capacity. Truckload carriers, those that haul a trailer full of freight, continue to silently consolidate because they primarily are small firms," she reported. The overall American Trucking Associations' (ATA) December truck tonnage index, which includes LTL and TL, was off 14.1 percent year-over-year in December—representing the worst decline monitored by the ATA since February 1996.
The cost for rail transportation was up 10.5 percent in 2008, while cumulative rail volumes were down three percent and intermodal fell 3.3 percent from 2007. "The biggest carload declines for the year were motor vehicles and equipment; crushed stone; sand; gravel; and coke," Wilson noted. "Coal carloadings were up 3.5 percent in 2008 and accounted for 45 percent of total U.S. non-intermodal carloads. Carloads of grain, another important commodity for railroads, also rose 3.1 percent in 2008." On the plus side, revenue per carload is rising, in part because of fuel surcharges.
Grinding to a Halt
Perhaps it's a sign of the times, but with all the talk about a dearth of funding and surplus need for U.S. infrastructureinvestment, counties in Michigan are turning back the clock to repair failing roads.
With the state reeling from the automotive sector's swift decline, and budgets strapped for cash, some jurisdictions are turning once-paved rural roads back to gravel to save money and perhaps hearken back to the glory days of the Ford Model T.
More than 20 of the state's 83 counties have reverted paved roads to gravel, according to the County Road Association of Michigan. The counties are struggling with their budgets because tax revenues have declined.
Montcalm County, by example, converted nearly 10 miles of primary road to gravel this spring. The county estimates it takes $10,000 to grind up one mile of pavement and put down gravel. It takes more than $100,000 to repave one mile of road.
California's Gold Flush
How important is manufacturing in the broader scheme of economic health and wealth? In California, manufacturing's gold rush has dissipated faster than developers can say "eureka"—only to realize they have lost another claim.
A new study conducted by economic think tank The Milken Institute shows that the loss of manufacturing jobs in California has had a major impact on the state's economy. The study explored the manufacturing industry's decline and simulated how it would have positively impacted the state's economy if it maintained the same level of manufacturing from 2000 to 2007.
"The sector's steady decline is undoubtedly a 'canary in a coal mine' for the state's economy," says Jack Stewart, president, the California Manufacturers and Technology Association.
The state would have generated $27.3 billion more in manufacturing wages and $54.3 billion more in total manufacturing related output if the industry had remained consistent since 2000, according to the report.
The Milken Institute conducted a similar study in 2002 and since then—before the current economic recession—California manufacturing has continually been on a downward arc.
"Do the math to see how much more the state would have seen in tax revenue," says Stewart. "It's crucial that California doesn't neglect this sector for another seven years."