2011 Annual State of Logistics Review: Lack of Recovery Leads to Tightening Trucking Capacity
This year''s Annual State of Logistics Review did not find as much improvement in the market as expected. Trucking remains the hardest hit transportation mode and tightened capacity is expected soon.
By DeAnna Stephens Baker
Date Posted: 8/1/2011
The logistics industry faced another year of challenges as the hoped for recovery failed to materialize last year.
Though there was some improvement, the significant increase in consumer spending and retail sales that had been expected to spur a recovery did not occur, according to this year’s Annual State of Logistics Report from the Council of Supply Chain Management Professionals (CSCMP).
“2010 was certainly a better year than 2009, but did not turn out to be all that we had hoped it would be,” wrote Rosalyn Wilson, a logistics consultant and author of the report. “The recovery from the Great Recession has proven to be more elusive and prolonged than any other in our history.”
A summary of some of the report’s key findings and noteworthy trends follows. The complete report is available online at www.cscmp.org.
• The cost of the U.S. business logistics system increased 10.4% last year, to $1.2 trillion, and 8.3% of the nominal Gross Domestic Product (GDP). This makes up more than half of 2009’s decline and puts 2010 roughly on par with 2005, but still well below pre-recession years.
• Inventory carrying costs increased 10.3% due to higher costs for taxes, obsolescence, depreciation and insurance, which were offset by a further drop in the inventory carrying rates and warehousing costs. Transportation costs were up 10.3% from the year before due to higher freight volumes, fuel surcharges, and rate hikes.
• Lean order and inventory practices were followed by both manufacturers and their suppliers during 2010, with little safety stock stored anywhere in the system. “There have been more stories about plants having to slow or shut down because a supplier was unable to come up with the part or materials when it was needed,” Wilson wrote.
• Excess capacity in the commercial warehousing and distribution sector resulted in the cost of warehousing falling by 6% during 2010. “As inventory levels rose throughout 2010 the cost to acquire extra space did not increase correspondingly,” Wilson noted. “The trend has been to optimize transportation and distribution patterns to minimize the number of facilities used. The average size of distribution centers is more than double that of just ten years ago.”
• Transportation capacity is close to being fully engaged, especially in trucking and air. Though volumes have only recovered around half of what was lost during the recession, total industry capacity is currently much lower than it was in 2007. “The recovery is not being felt evenly throughout the economy and 2010 did little to shore up precarious carriers who have been hanging on hoping to be rescued by a resurgence in the economy,” Wilson wrote.
• There was an unsteady year over year growth in freight volumes. Monthly tonnage, carload and intermodal and container data saw frequent spikes and valleys. Truck tonnage rose only 5.7% in 2010, not recovering the 8.7% drop it saw in 2009, let alone drops from earlier years.
• Trucking continued to lag behind other modes in performance, rising only 9.3% compared to an average of 15.4% for the other modes combined. As the largest part of the transportation sector (78%), trucking remains the hardest hit mode as it struggles to cover costs, particularly rising fuel costs. Though much of the increase has come from fuel surcharges, most truckers have not been able to recover all of their actual added fuel costs.
• At present, truck freight volume is rising faster than new drivers are being hired. The largest decrease in employees during the recession has been in the trucking sector which has lost 13.4% of its workforce in the past four years. In addition, a recent survey found that 42% of responding fleets were having trouble filling empty seats, limiting the new capacity they can add.
• Wilson expects drivers to become a limiting factor in truck capacity, slowing the return of trucks to the marketplace and giving carriers their choice of customers. Long term driver demographics may impact future capacity as one in every six of current drivers is age 55 or older and less than one-fourth are under 35. Wilson suggests companies plan for that now by strengthening relationships with trucking firms. “It is going to be all about relationships and carriers having the luxury of choosing who they do business with,” she wrote.
• The cost for rail transportation made up 2009’s decline, with a 21.8% increase. “U.S. Railroads have recovered some lost ground, but not nearly all of it,” wrote Wilson. “Revenue rose steeply, as the railroads had success in 2010 raising rates and having them stick.”
• Though nine of the ten top ports in the U.S. saw an increase in TEUs moved, traffic through the ports contracted again in 2010 and costs for the water sector rose 14.1%. Wilson said that mega container ships ordered prior to the recession that almost doubled available capacity have caused over capacity to be the single biggest issue for the sector.
• Spot rates for ocean shipping dropped between 40% and 50% over the final quarter of 2010 and beginning of 2011. Though rates had risen significantly compared to 2009, excess capacity combined with a weakening demand led to carriers offering lower spot rates in the trans-Pacific trades starting around August 2010.
• An 11.2% revenue increase was seen in air freight. However, most of that was during the first half of the year. “By mid-year even specialized technology items were back to being moved on ships,” Wilson wrote. Also, a number of carriers have recently decommissioned aircraft, resulting in a 12% decrease in fleet capacity.
• Like the air industry, freight forwarders did well during the first half of 2010, when it began to struggle like the rest of the industry. However, the sector still saw a 15.4% increase.
• Though GPD rose in 2010, logistics costs grew even more. “Looking at the numbers we see that the growth in logistics cost has outpaced the growth in GDP prior to the recession and has returned to that pattern,” wrote Wilson, who expects logistics costs to grow faster than GDP for the next several years.
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