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Review of the Annual State of Logistics Report: Reduced Capacity Causes Concern for Future
Survey indicates that logistics and transportation capacity shortages loom in the horizon. Smart forest products companies need to adjust to be ready.
By DeAnna Stephens Baker
Date Posted: 8/1/2010
Declining logistics costs and excess capacity caused many companies to either downsize or go out of business last year. Now, fears of coming capacity shortages are growing along with demand. This should be a concern for both the wooden pallet and the overall forest products industry.
This years Council of Supply Chain Management Professionals (CSCMP) Annual State of Logistics Report was appropriately titled, The Great Freight Recession. Produced by Rosalyn Wilson, a logistics consultant and researcher, it gives an overview of the condition of the U.S. supply chain with a look at how it will be affected in the near future.
The following is an overview of key developments and significant trends from the report:
Logistics costs continued the decline that started in 2008. Low volumes and extreme rate pressures pushed transportation costs down more than 20%. The consequence of this along with a double-digit drop in inventory carrying costs was that logistics fell to $1.1 trillion - 7.7% as a percentage of the nominal gross domestic production (GDP), the lowest level measured since the series started in 1981.
Excess capacity was reduced, especially in trucking, but still by record numbers in the rail, air and ocean industries as well. The rail, air, and ocean sectors laid up equipment at rates not seen in decades, Wilson wrote. This included permanently disposing of assets by selling them in the second-hand market or as scrap and many carriers going out of business.
All business inventories dropped for the first three quarters of 2009, before rebounding somewhat in the last. The average investment in inventory dropped to $1.85 trillion, losing $89 billion as both manufacturers and retailers showed reluctance to order new materials and goods until the end of the year when warehouses and distribution centers were low on stock.
Wilson wrote that the negative effects of the recession were felt more in the logistics industry than in most other industries because the downturn in each sector translated into a loss in shipment volumes. This caused carriers to compete for dwindling shipment volumes, with spot rates falling below costs in some modes.
Trucking was one of the hardest hit modes of transportation. Truck tonnage was down 8.7% on top of already depressed levels from 2008. Over capacity created strong competition for available loads, causing price wars that dropped spot rates below costs.
Many trucking companies chose to reduce fleet sizes and about 2,000 went out of business. This, along with the more than 140,000 drivers who left the field is expected to cause capacity shortages as demand grows. We can expect some capacity restraints by year end, with both equipment shortages and driver shortages, Wilson wrote.
Rail capacity, however, should not have any problems keeping up with rising demands. The railroad industry has abundant capacity and can readily bring it and workers back on line as demand grows, Wilson wrote.
Costs for the water sector fell over 20% as well. Port traffic contracted with nine of the top 10 ports registering a decline in twenty-foot equivalent units (TEUs) moved (Oakland was the exception). Large losses were reported by ocean carriers. The ocean sector has been damaged during the recession and will take many years to recover, Wilson wrote. However, rates which had been pushed below costs for much of the year did begin rising by the end and has continued to strengthen, with December 2009 marking the first year-over-year increase since 2007.
Capacity restraints should be expected by the end of 2010. While rail and ocean capacity are still abundant, backlogs are already being seen in air cargo and the trucking industry does not have enough parked capacity to quickly respond to growing demands.
While third party logistics (3PL) did well during the beginning of the recession by using the abundant capacity to broker lower costs for their clients, by the second quarter of 2009, they started to be impacted by reduced volumes and rates that could go no lower. The international segment was the hardest hit with a drop of 25%. Value added warehousing and distribution, by contrast, fared much better, with a drop of only 0.7%. Wilson also noted that many shippers are now returning to their core carriers, which may have been neglected during the recession, and that tight capacity may soon push shippers back to using 3PLs.
Things are improving, but it will be a slow process. With volumes picking up, capacity tightening, and higher rates on the way much of the drop in transportation costs should reverse itself although it will probably be 2011 before we see pre-recession levels, Wilson wrote.
A complete copy of CSCMPs report is available online at www.cscmp.org.