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Logistics Report Focuses on Agility in the Market, Sharing Information
Logistics Suppliers Failed to See Brake Lights Ahead as the Economy Slowed

By Rick LeBlanc
Date Posted: 10/1/2002

Responding quickly to changing market conditions will become an increasingly important competitive advantage in the future.

Case in point: when the economy went sour last year, it didn't take long for the phone to stop ringing at many pallet suppliers. Manufacturers hit the brakes in order to keep inventory levels in line. In fact, they not only reduced stocks from accumulating, but also eventually reduced inventories significantly in the face of the economic downturn. This disruption spelled trouble for many logistics suppliers who failed to see the brake lights ahead. However, the reductions helped to position manufacturers for economic recovery.

This rapid response underscores the need for agility and accurate information sharing among supply chain participants, according to Robert Delaney, who recently issued his 13th State of Logistics Report, co-written by consultant Rosalyn A. Wilson.

The purchasing agent or shipping manager who buys pallets may not read Delaney's report, but it is a ‘must read’ for many top supply chain and logistics executives. They are becoming increasingly important in decision making that effects logistical systems -- and ultimately down the line, pallet buying patterns.

Delaney, president of Cass Information Systems, a third-party provider of freight bill auditing and payments, has been examining logistics performance for over two decades since transportation deregulation began. In recent years his annual report, co-sponsored by ProLogis, a major distribution services provider, has focused on the effect of emerging trends on logistical performance.

To arrive at total logistics costs, Delaney looked at a combination of estimated inventory carrying costs along with total transportation costs for moving goods (Table 1). Using this method, he estimated total logistics costs at about $970 billion in 2001 -- more than $30 billion less than 2000.

Transportation continues to be the biggest cost of logistics. It has weighed in at about 6% of Gross Domestic Product (GDP) for the last decade or more. Last year, however, it was at a record low of 5.9%, reflecting the tough market economy and the inability of transportation providers to increase prices. (To put things in perspective, pallet expenditures are somewhere below 1% of logistics costs or less than one-tenth of 1% of GDP.)

Overall, logistics achieved its best report card in 2001 in the 21 years that Delaney has been tracking logistics productivity and the largest productivity gain since 1991 (Table 2).

In recent years, industry has been putting an increasing share of its logistics spending into third-party management, a trend reflected in the pallet industry in pallet rental and pallet management. In 2001, third-party logistics spending continued to grow, albeit more slowly -- only 7.4% compared to over 24 % the previous year. With annual spending on third-part logistics now nearing $61 billion, Delaney attributed the lower growth rate more to the economic slow-down than a waning confidence in the third-party concept. In some segments, such as value-added and customized services, spending growth in third-party logistics was still over 13%.

The report also noted practices undertaken by managers that benefit the cost centers they oversee yet contribute to poor overall return. (It is a familiar situation to those in the pallet industry who deal with purchasing agents making decisions based on pallet price rather than overall pallet cost.) The authors cite the case of companies that change to larger shipment quantities or slower or less reliable modes of transportation in order to achieve transport savings. Unfortunately, this practice drives the need for larger inventories and can result in false economies.

The State of Logistics Report indicates that current trends and practices will continue. The enthusiasm for third-party logistics will carry on, but it may begin to flag. We will have to wait to see if third-party spending continues to wane as the economy improves. Inventory reduction remains in the spotlight. This translates to pallet users pushing the trend of unit loads in motion rather than at rest.

"Agility, accommodation, and flexibility are the keys to survival for supply chain managers," the report stresses. "The emphasis is on constant adjustment today, not optimizing on yesterday's data."

This emphasis on reacting quickly and shorter lead times to changing conditions translates into increasingly volatile market conditions for all logistics suppliers, and it is more critical than ever for everyone to keep their eyes on the road. Improved information sharing among savvy supply chain partners can help reduce this volatility and strengthen supplier-customer relationships in spite of it.

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