Annual logistics report shows rate recovery, but experts warn of looming truck capacity shock.
By Eric Kulisch
U.S. business spending on purchased freight transportation and logistics services increased 6.6 percent, or $79 billion, in 2011 to $1.28 trillion as companies held more inventory and paid higher rates for trucking and rail transportation, according to the 23rd annual “State of Logistics Report.”
Logistics costs are still well below the peak of $1.39 trillion in 2007, before the global financial crisis, and in relation to the overall economy are near an all-time low. Logistics costs as a percentage of Gross Domestic Product - an indicator of the industry’s relative efficiency — was 8.5 percent, the same level as in 2003 and up from 8.3 in 2010. Logistics costs accounted for 9.9 percent of economic activity in 2007 and plummeted to 7.9 percent in 2009.
Growth in logistics costs slightly outpaced growth in GDP the past couple of years, as it did prior to the recession.
|Sources: CSCMP’s State of Logistics Report.
Overall, transportation costs climbed 6.2 percent because of higher rates, not volume or distance increases.
Railroads enjoyed the biggest revenue jump among the freight transport modes, tallying overall sales 15.3 percent above the previous year, according to the report by analyst Rosalyn Wilson and published by the Council for Supply Chain Management Professionals.
Trucking companies were able to increase rates 5 percent to 15 percent, despite a modest downward tick in volumes.
Third party logistics providers fared well last year, with revenue increasing 10.9 percent to $141.2 billion as shippers turned for help during an uncertain economic period, according to consultant Armstrong & Associates.
Inventory levels have returned to pre-recession levels, with extra inventory now held by manufacturers and wholesalers instead of retailers. Average inventory investment for all industry sectors grew 8 percent, to more than $2.1 trillion, resulting in a 7.6 percent increase in inventory carrying costs because of taxes, depreciation and obsolescence, Wilson said.
Ongoing economic uncertainty and slow growth suggest the freight sector will remain relatively flat in 2012, but even incremental growth is starting to result in tightened truck capacity in some parts of the country, according to the report. Motor carriers have pared back fleets in recent years in response to weak demand and are having trouble finding enough qualified drivers, in part due to tighter safety regulations.
During a panel discussion following the report’s release in Washington, several industry executives said talk of a possible capacity crunch in the trucking sector is now becoming real in many parts of the country, prompting shippers to more seriously embrace intermodal and dedicated fleets to get loads to customers.
Motor carriers responded to the recession by selling used tractors, many of them overseas, and deferring purchases of replacement equipment. Thousands of trucking companies, most of them small outfits, shut down for good. Investment in new vehicles remains difficult because of the rising cost of equipment with mandatory clean-emissions technology and associated maintenance, insurance, and fuel as well as tougher lending standards from banks.
In total, the truckload sector lost an estimated 20 percent of its capacity during the past five years.
The industry has generally been judicious about adding new trucks until demand growth becomes more certain and companies can command larger margins, something that’s difficult with the uneven economic recovery.
Many drivers left the industry during the economic downturn and there are fewer young people who want to drive trucks while the driver pool is skewed to older workers that are retiring at a faster pace. About 18 percent of carriers surveyed at the end of 2011 by Transport Capital Partners, a strategic advisory firm specializing in trucking, reported that 6 to 10 percent of their trucks were unseated because of the driver shortage.
New hours-of-service regulations set to take effect in July 2013 will reduce the maximum number of hours a truck driver can work in a week, resulting in a further loss of productivity, according to trucking officials.
The biggest challenge since last year has been trying to find available trucks to haul merchandise, Rick Jackson, executive vice president of Mast Global Logistics, the logistics arm of Limited Brands, confirmed.
The company is less reluctant to use railroads for store deliveries because the industry’s reliability has improved so much in recent years and can meet the needs of time-sensitive shippers like those in the fashion industry, he said.
“We’re starting to see on-time delivery failures increase” in some regions because of truck scarcity, Rick Sather, vice president of customer supply chain for Kimberly-Clark, said. The situation is putting pressure on shippers to hold more inventory, he added.
The problem is most prevalent in the Southeast and Northeast, and during certain peak periods, such as the harvest season in Florida.
The consumer goods manufacturer is reacting by beginning to shift outbound shipments to the truck-rail hybrid mode after being an intermodal user for inbound and plant-to-plant moves, Sather said.
Limited’s failure rate for on-time deliveries more than doubled in 2011, Jackson said. In addition to intermodal, the company is also using more dedicated contract carriage to guarantee access to equipment.
Customers are increasingly willing to be more flexible and consider dedicated fleets as supply tightens and rates rise, Joe Gallick, senior vice president of sales at Penske Logistics, said.
Dedicated is similar to having a private fleet without owning the assets. More carriers have stood up dedicated operations in recent years to provide service to customers willing to pay a bit more for a higher level of service.
Gallick said shippers will continue to shift to the dedicated “mini-mode” to lock in capacity as truck availability tightens.
The support expressed for intermodal is illustrated in statistics from the Association of American Railroads which show that intermodal volume grew 5.4 percent to 11.9 million containers and trailers last year.
Railroads moved 996,022 containers and trailers, up 49,168 units, or 5.2 percent in June versus a year earlier. The June weekly average of 249,006 units is the highest on record and the third highest for any month, behind August and October 2006. Intermodal originations for the first half of the year were up 3.3 percent (193,541 units) compared to the same period in 2011, and for the first half of the year are slightly ahead of 2006’s record pace, according to the AAR.
At privately held BNSF Railway, domestic intermodal increased 6 percent in the first quarter and was up almost double digits through mid-June compared to the first half of 2011, John Lanigan, the company’s chief marketing officer, said.
Large trucking companies like J.B. Hunt, Schneider and UPS for years have invested in intermodal chassis and placed shipments with railroads as a way to deal with the driver shortage and reduce costs for long-haul moves.
BNSF and Union Pacific have recently increased their intermodal penetration into small and midsized trucking companies, according to Wilson. She reported a Union Pacific official as saying last November that if truckload capacity is reduced 5 percent because of new regulations and the driver shortage, it could equate to a 29 percent increase in total intermodal loads.
Intermodal is also gaining favor as a cost-reduction and sustainability strategy in Europe, where the freight rail system lags that of the United States.
Procter & Gamble has set a goal of increasing its intermodal share of purchased surface transportation from 10 percent to 30 percent by 2015, according to slides presented at a March 2011 environment workshop in Malmö, Sweden, by a company engineer. The effort is dubbed Project TINA, for “Trains, Intermodal, a New Approach.”
P&O Ferrymasters, a large third-party logistics provider in Europe, arranges for up to five shuttle trains per week to haul pet food from P&G’s IAMS plant in Coevorden, the Netherlands, to Rotterdam for connections to trains throughout Europe, as well as ocean vessels and barges, according to last year’s announcement of the contract renewal on Ferrymaster’s Website.
Sather echoed warnings by many logistics specialists in recent years for shippers to treat carriers better through rates and freight that is easier to handle, saying those that continue to press for the lowest transactional cost will wind up without access to vehicles when the economy fully rebounds.
Some shippers have contributed to the capacity problem by over reacting to carrier safety scores compiled by the Federal Motor Carrier Safety Administration, according to Wilson and industry experts.
The new Compliance, Safety and Accountability program collects much more accurate and timely data about the driving history and safety record of carriers and their drivers. The FMCSA uses the data to rank carriers in certain categories and generate an overall safety score. Many carriers are now becoming more selective about the drivers they hire, which analysts say could force 5 percent or more of the driver pool out of the industry.
Wilson said shippers made the mistake of quickly dropping carriers with lower scores to reduce their liability exposure in case a truck hauling their cargo is involved in an accident, but then found it difficult to get their products moved in a timely fashion.
Shippers have become smarter and now include clauses in their contracts requiring carriers to use their best equipment, or only equipment that has passed inspection, for their accounts and to have a plan for remediating their CSA scores. Carriers that do not show improvement over time can then be terminated.
Shippers worry about rising inventory levels, but solutions differ. Several years ago Walmart pioneered the practice of forcing suppliers to hold more finished inventory in order to keep its storage costs low. Meanwhile, manufacturers often feel the need to keep more materials and parts on hand to avoid getting caught short and shutting down an assembly line.
Sather said collaboration between retailers, distributors, suppliers and transport providers will become more common to increase service levels while bringing down the total amount of inventory required. Obtaining real-time data on sales activity at the store or area level can help suppliers make sure inventory flows to the right place.
“Otherwise, inventory gets pushed to one party or another and at the end of the day, no one really wants that,” he said.
But inventory at the wholesale level makes for a more fluid supply chain because it’s easier to direct shipments to the retailers or stores where they are needed on short notice, Wilson said.
Limited, which sells lingerie, personal care products and accessories through outlets such as Victoria’s Secret and Pink, is studying near-shoring or on-shoring some sources of imported goods to shorten order-to-delivery cycle times, get products to market faster and reduce inventory, Jackson said.
The retailer joins a growing crowd of U.S. companies moving production facilities to Central, South or North America as transportation and production costs continue to climb in countries once considered much cheaper sourcing options. The trend is also spurred by a desire to have more control over quality and compliance, which can be difficult to manage for a supply base in Asia.
Jackson acknowledged that the liner industry’s practice of slow-steaming to reduce fuel burn also may play a factor in the decision because of the two to three days it adds to ocean transits. During the past couple of years, Limited’s Mast logistics arm has increased the amount of volume booked on air cargo carriers, while ocean volumes have remained flat, he said.
“A lot of our efforts on the supply chain side are to increase the agility for our brands,” Jackson said. The goal is to get offshore production to “feel like the factory is next door in terms of compressing the amount of time” to get merchandise to market, he added.
Correction: The feature story, “Supply chain checkup,” (August, p. 6-9) stated that third-party logistics revenue in the United States last year was $141.2 billion, based on a chart from the “State of Logistics” report by Rosalyn Wilson and the Council of Supply Chain Management Professionals. The chart was a reproduction of work done by Armstrong & Associates, but incorrectly included the consulting company’s estimated 2012 market size instead of $133.8 billion, the actual amount spent on outsourced logistics services in 2011.