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This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin boardwithout prior written permission from CSCMP.
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21st Annual
State of Logistics Report
The Great Freight Recession
June 9, 2010National Press Club, Washington, DC
Presented by Rosalyn WilsonP: 703-587-6213 E: [email protected]
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2
Introduction
The cost of the U.S. business logistics system declined 18.2 percent in 2009, the
largest drop ever since the series was started (Slide 1). Business logistics costs fell to
$1.1 trillion, a decrease of $244 billion from 2008. Combined with the drop in 2008, total
logistics costs have declined almost $300 billion during the recession. In 2009,
logistics costs as a percent of the nominal Gross Domestic Product (GDP) hit a historic
low at 7.7 percent.
Both major components of the cost models declined in 2009. Inventory carrying costs
fell 14.1 percent in 2009 (Slide 2). The decrease in carrying costs was due to both a 4.6
percent drop in inventories and a 10 percent drop in the inventory carrying rate.
Transportation costs plummeted 20.2 percent from 2008 levels. Trucking, whichcomprises 78 percent of the transportation component, declined 20.3 percent. All other
modes combined declined 20.5 percent.
The recession which began in December of 2007 and continued through more than half
of 2009 had a negative impact on all segments of the logistics system. The logistics
industry felt the negative effects of the recession more than most other industries
because the downturn in each individual sector translated into a loss in shipment
volume. Inventories continued to climb for the first half of 2008 filling warehouses and
retail shelves. In mid-2008 bloated inventories began to be drawn down until they
reached pre-recession levels in late 2009. Throughout the period, orders for new goods
dropped off substantially and carriers competed for a dwindling volume of shipments.
Spot rates for some modes fell below costs, further adding to the financial decline.
Excess capacity in the system was rationalized or reduced, particularly in the trucking
and air cargo industries. Some was the natural result of carriers that went out of
business, but much of the reduction was the result of business decisions. The tenuous
business climate and tightened credit controls will make it difficult to rapidly expand
capacity for the remainder of 2010. The economy is showing stronger signs of recovery
as we move into the second half of 2010 and it is likely that we will have capacity
problems in some areas by years end.
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3
The Business Logistics System2009
After rising over 50 percent in the five years leading up to the recession, total logistics
costs fell in 2008 and 2009. Transportation costs were down over 20 percent in 2009because of low volumes and extreme rate pressures. Interest rates continued their
downward spiral, while inventory levels dropped off, leading to another double digit
drop in inventory carrying costs. Logistics as a percent of our nominal GDP fell to 7.7
percent to the lowest level measured since the series started in 1981 (Slide 3).
[Note: The Department of Commerces Bureau of Economic Analysis issued a revised
Gross Domestic Product series recently. The revisions are incorporated into the
accompanying table entitled The Cost of the Business Logistics System in Relation to
GDP and in other calculations used in this report. The revisions are minor, but they do
cause rounding differences in some cases.]
Although virtually every company involved in the supply chain cut costs and increased
productivity, this precipitous drop was caused more by the rapid decline in shipments
and the cutthroat rate environment. Revenues for most carriers were depressed in
2009 and some, like ocean carrier Maersk, had losses for the first time in their firms
history. Many carriers are forecasting a better revenue picture for 2010 however.
Inventories have hit rock bottom, orders are being placed and commodities are moving
again. Inventory levels have been inching up. In addition interest rates have risen in
each of the last three months. 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. Likewise,
inventories are on the rise again and the Federal Reserve will not be able to hold theline on interest rates indefinitely. Already inching up, interest rates are expected to pick
up by the third quarter of this year.
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All business inventories dropped for the first three quarters of 2009 and then
rebounded slightly in the fourth quarter. Inventory levels remain below pre-recession
levels. The average investment in all business inventories (agriculture, mining,
construction, services, manufacturing, wholesale, and retail trade) dropped to $1.85
trillion in 2009, losing $89 billion (Slide 4). Businesses cleared inventory at a rate notseen for thirty years, but were still unable to keep ahead of the drop in sales. Both
manufacturers and retailers were reluctant to order new goods and materials until late
in 2009, when warehouses and distribution centers were very low on stock.
Compared to the 2001 recession we were quite slow in responding to the mounting
inventories. In 2001, which was a much shorter recession, the response was immediate
with inventories drawn down gradually. In the recent recession inventories continued to
climb until about midway through the period and then they plummeted. There are
several reasons for the slow response time, not the least of which is the impact of long
off-shore supply chains. Orders in the pipeline placed months earlier were fulfilled and
delivered well into the recession despite market conditions at the time of delivery.
Retailers responded the quickest, adjusting for falling consumer demand in early 2008.
Wholesalers and manufacturers did not begin to respond until mid-2008. [Note: the
recession periods used for this report are those used by the Federal Reserve.]
After several years of relatively level performance, the inventory-to-sales ratio began
skyrocketing from 1.26 in late 2007 to 1.48 in early 2009. This mirrored the steep rise in
inventories as sales dropped off. By first quarter 2009 we had cleared out significant
inventory and sales began to slowly build in the latter part of 2009. By the end of 2009
the ratio had returned to 1.26 and the most recent ratio has even dropped to 1.23 (Slide
5). Most of the stabilizing effect resulted from the draw down of inventories, which once
completed, helped sales levels more evenly match the remaining inventories. The ratio
has continued to slide because sales are picking up, but there has not been any
substantial restocking of inventory. Most firms looked to lean inventory practices to
contain costs and drew down even their safety stocks.
Retailers responded to the drop in consumer spending by changing their product mix to
skew it towards lower cost products. Product selection has shrunk in many stores as
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the number of like products carried by an outlet has declined. Grocery stores and
alcoholic beverage outlets fared better than the restaurant industry
as consumers cut back on dining out. Even in this market, lower priced items
performed better than higher priced ones. For example, beer sales dropped in bars
and pubs but increased in take-home outlets. Sales of imports dropped off but localcraft beers and domestic brands sold well.
Manufacturers followed very lean ordering practices in 2009. Often suppliers were
called on to hold the supplies in their inventory to reduce the manufacturers exposure.
Their suppliers followed suit and cut back on what they held in inventory. Several
manufacturers have reported having to shut down production lines because they lacked
the necessary materials and parts to produce finished products. We could see more of
this because of lengthy delivery times.
The cost of carrying inventory is determined not only by the value of private inventories,
but also the interest rate for holding those inventories. We used annualized commercial
paper rates for the interest component in the SOL model. The annualized rate fell to .26
percent in 2009, ranging from a high of .4 percent early in the year to .13 percent in
December (Slide 6). Interest rates were cut again in January 2010 to 0.11 percent, but
have risen for the last three months and now sit at .21 percent. The result of lower
inventories and historically low interest rates is an 89 percent drop in the interest
component of carrying costs.
Taxes, obsolescence, depreciation, and insurance were down 6 percent in 2009.
Insurance costs, which had been volatile several years ago, remained even with little or
no adjustment. Taxes, depreciation, and obsolescence were down marginally due to
lower inventory levels.
The cost of warehousing fell 2 percent in 2009. Warehouses were still full in early 2009
because retailers could not move their goods. By midyear, inventories had been
liquidated or consolidated freeing up warehouse space. Vacancy rates rose as
inventories fell in 2009. There was more significant pressure on rents in the latter half
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of the year. Inventory recovery and growth in exports as much of the rest of the worlds
economies recover as well were welcome signs for this segment late in 2009. The
forecast for vacancies going forward show a continued rise due to weak demand, but
improvement by year end. Rents should continue to be depressed until demand picks
up towards the end of this year. The tightened credit market and high vacancy ratehave substantially reduced new construction. Interestingly defaults and foreclosures on
warehouse properties have been few. Lenders have preferred to extend and modify
terms on expectations that the market will rebound.
Transportation costs declined 20.2 percent in 2009 (Slide 7). Carrier revenues, which
are used to measure the cost to shippers, fell in 2009 ranging from a 4 percent drop in
pipeline revenues to a 27 percent drop in air cargo revenues. With the exception of oil
pipelines all modes experienced double digit losses.
Trucking, the largest component of the transportation sector, has been one of the
hardest hit modes throughout the recession, dropping 20.3 percent in 2009. On a
volume basis, truck tonnage was down 8.7 percent in 2009, over already depressed
2008 levels. There was abundant capacity competing for fewer and fewer loads. The
fierce competition led to price wars which often dropped rates below cost on the spot
market. Faced with management mandates to cut costs, many shippers abandoned
long standing relationships with carriers in favor of the spot market or the use of 3PLs.
3PLs pressed trucking companies hard to lower or at least hold rates. Fuel prices
continued to be volatile, but fuel surcharges played less of a role in revenue generation.
Industry average lengths of haul are continuing their long term downward turn, while
long-haul truck ton-miles have also fallen off. These shifts are the result of higher
usage of intermodal and more regionalization of distribution centers in response to
higher fuel costs.
Truckload industry capacity is still dropping at unprecedented rates. In 2009, freight
volumes were declining faster than capacity so there was no incentive to keep
equipment. Many trucking companies used the economic downturn to evaluate their
business model and most chose to reduce their fleet size to operate more leanly. In
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addition to planned reductions in capacity, about 2,000 trucking companies went out of
business in 2009, removing still more trucks. Trucking acquisitions and mergers have
increased as companies in good financial health look for ways to strengthen their
market position. Donald Broughton of Avondale Partners tracks trucking industry
bankruptcies and capacity changes. He has forecast that another 2,000 firms will bedriven out of the industry in 2010 because of higher operating costs and low demand
for freight services. According to the American Trucking Association (ATA) the nations
freight pool contracted by 12.5 percent in 2009. Heavy truck utilization is currently at
about 75 percent which is not enough to generate new truck sales.
The poor market for trucking services and falling revenues have led many companies
right to the brink of failure. Lenders have extended credit terms rather than repossess
the assets over the last two years, but these practices are coming to an end. Also,
many companies put off preventative maintenance and now are facing the
consequences of those actions. Some will simply be unable to pay for needed repairs
and upkeep. The Federal Motor Carrier Safety Administration will step up enforcement
of safety later this year with a new federal program, Comprehensive Safety Analysis
2010 (CSA 2010). Beginning in November, all carriers will be evaluated and scored on
a variety of safety measures and corporate record keeping. Poor scores will result in
warning letters to fix problems or even loss of operating authority. The compliance
costs for this program will be high for some carriers.
Another capacity issue which will rise up again is driver shortages (Slide 8). In 2005 the
ATA commissioned a study that measured a shortage of 20,000 long haul truck drivers.
Since 2007 about 142,660 drivers have exited the field. Since shipments were
plummeting at an even faster rate during the same period, the driver loss was not a
cause for concern. In fact carriers were able to pull back on some of the programs they
had instituted to retain and attract drivers. By mid-2009 many job-seekers from other
sectors of the economy (particularly construction) were making the driver market quite
competitive. As the economy improves it is expected that a large percentage of the
drivers hired during the recession will return to their previous occupations. About one in
six truck drivers is age 55 years or older. These drivers will need to be replaced in the
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next ten years. UPS, for instance, recently said it expects 25,000 of its baby boomer
drivers to retire over the next five years. Less than one quarter of current drivers are
under 35 and the industry has been attracting a declining share of young new entrants.
The lack of drivers will also slow the return of trucks to the marketplace. CSA 2010 willalso have some impact on driver availability as closer attention is paid to hours of
service. Another factor hindering driver recruitment is the reduction in driver pay during
the recession. To rein in costs carriers reduced pay by 6.6 from the third quarter of
2007 through the first quarter of 2010 according to a survey conducted by Morgan
Stanley. The low pay and unattractive working conditions are causing some would-be
job seekers to stay on unemployment. In a recent online seminar, Noel Perry of FTR
Associates predicted driver shortages beginning in 2010 and continuing into 2012
about 400,000 by next year!
The cost for rail transportation was down 20.6 percent in 2009. Carload traffic was
down 16.1 percent and intermodal traffic declined 14.1 percent2009 was the worst
year on record since 1988 when the Association of American Railroads (AAR) began
tracking the data series. Every major commodity group experienced a decline, including
a 10.9 percent drop in coal carloadings, which accounts for nearly half the carloads
carried in 2009. Coal shipments were down primarily due to a drop in demand for
electricity because of the slow economy, a milder winter and comparatively lower
natural gas prices. Other big losers were construction related products such as lumber
and wood, down 33.3 percent; crushed stone, gravel and sand, down 22.1 percent; and
stone, clay, and glass products, down 21.7 percent. Motor vehicles and parts fell 33.6
percent. Much of the decline in intermodal traffic during 2009 is attributable to the 33.8
percent drop in trailers hauled. Container traffic was down only 8.7 percent. Fuel costs
were down 53.3 percent for Class I railroads due to a significant decline in usage
because of traffic levels and a 43.2 percent drop in the average price of a gallon of
diesel fuel. The absence of fuel surcharges and aggressive pricing strategies dropped
revenue per ton-mile to 3.01 cents per ton-miles in 2009 from 3.34 cents in 2008. The
good news is that fuel as a percent of operating expenses went from 25.8 in 2008 to
15.3 in 2009.
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The recession has had an impact on rail capacity as well. As of December 2009 28.8
percent or close to 450,000 freight cars were in storage. In mid 2009 the number of rail
cars in storage climbed over 500,000 to almost 32 percent of the fleet. Just for
comparison, normally two to three percent of freight cars are in storage when theeconomy is healthy. Several thousand locomotives have also been parked to wait for
the recovery. The Association of American Railroads has estimated that the industry
now has approximately $43 billion dollars in idle assets. The big difference between the
loss of capacity in the trucking sector and the loss in the rail sector is that the rail
equipment has been merely sidelined and is readily available to return to service when
demand rises. In 2009 BN, UP, and CSX purchased 331, 127, and 2 new locomotives
respectively. NS added 23 rebuilt units to its fleet.
Warren Buffets Berkshire Hathaway, Inc., bought Burlington Northern Santa Fe
Corporation in November 2009 in what was called an all-in wager on the economic
future of the United States. In a similar move, just last week Caterpillar, Inc., expanded
its rail business by acquiring Electro-Motive Diesel (EMD), one of the two major US
locomotive manufacturers.
Costs for the water sector fell 21.6 percent in 2009 (Slide 9). Traffic through the
nations ports contracted again in 2009, with all top ten ports (except Oakland)
registering a decline in TEUs moved. The ocean carrier sector has been damaged
during the recession and will take many years to recover. Ocean carriers reported big
losses in 2009. Rates, particularly spot rates, were pushed down below costs for much
of the year as desperate carriers tried to fill their ships. Rates did begin to rise by the
end of 2009 and have continued to strengthen in the first half of 2010. The Drewry
Container Freight Rate Insight report showed a growth of 18 percent in spot rates from
July to September, followed by a 6 percent rise through November. December 2009
marked the first year-over-year increase in rates since 2007. Average ocean rates in
late 2009 were still 20 percent below the peak in 2007. It is essential for the industry to
raise rates to ensure their future viabilityand from all accounts they are holding firm
on rates.
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Roughly one quarter of the world fleet was laid up at some time during 2009. Ships
have been scrapped and fleets trimmed. However this did not dramatically impact
industry capacity, because of the delivery of new ships that were in the construction
pipeline. Asian carriers have been strategically reducing the number of containershipsthey own to shore up flagging balance sheets. Seven major Asian carriers have
disposed of about 16 percent of their fleet, more than half sold for scrap and the
remainder sold in the second-hand market.
Carriers have been reluctant to bring mothballed ships back on line while they are still
sailing at less than full capacity. Routes have been curtailed and shipping times have
lengthened. Many shipping lines have adopted the practice of slow steaming or
cutting back on speed. This has the twin benefits of saving fuel and reducing
emissions; however, shippers are not thrilled with the results: eroded on-time reliability.
According to Drewry Shipping Consultants, only 53 percent of the 1,600 ships they
tracked in the final quarter of 2009 arrived by the scheduled arrival day. Shippers are
facing longer delivery times with less predictability than before the recession. Carriers
began returning laid up containerships to service in the second quarter of 2010. In
addition 25 new vessels have come on line.
Ton-miles carried on the nations inland waterway system were down 15 percent in
2009. (Slide 10) The Army Corps of Engineers Monthly Tonnage Indicator shows that
for most of 2009, levels were lower than in any of the preceding three years. Figures
have been released for the first three months of 2010 and the trend is off to a good
start with March levels higher than in either 2008 or 2009. This segment of the industry
remains hampered by aging infrastructure and failing locks. There has been little or no
infrastructure investment in riverside facilities to increase traffic or to add a significant
amount of container shipments via barge. Updating and transforming the waterway
system would add vital capacity to the overall system.
The recession significantly slowed thepace of shipping on the Great Lakes in 2009with ton-miles down 32 percent. The major US-Flag carriers hauled 66.5 milliontons ofdry-bulk cargo in 2009, a decrease of 34.2 percent compared to 2008. Coal cargo was
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down 17 percent compared to a year ago because of reduced demand from power
plants and lower exports to Canada. There was a 28 percent decrease in limestone
cargo, a commodity used by the constructionindustry.The Lake Carriers Associationreports that the reduced demand forced seven carriers to cease operations in 2009.
Oil pipeline volumes were depressed in 2009, but rates which are regulated for the
industry went up. The result was a decline of 4 percent in pipeline costs.
Air freight revenue declined 27 percent in 2009. The industry was hit very hard during
2008 and the first half of 2009. Cargo traffic declined 11 percent in 2009, which is the
largest drop on record, even eclipsing the decline during the 2001 recession. There
was a severe drop off in demand of this higher priced premium service. In fact, even
parcel carriers like UPS and FedEx reported that customers were shifting to lower cost
ground options to save money. The pickup in the latter part of the year reflected the
lengths businesses were willing to go to in order to bolster their inventory. One of the
factors leading to the peak season surge was the fact that Chinese factories were not
able to respond to orders fast enough to use sea freight because they had shut factory
doors and sent home their workforce. Most carriers do not see this as a permanent shift
however and do not have plans to add capacity or recommission parked freighters.
During the downturn many carriers decommissioned aircraft and removed them from
their fleets. The Air Transport Association (IATA) says that 12 percent of cargo capacity
was lost in 2009, with widebody freighter capacity down 22 percent. The air freight
industry is experiencing one of the most intensive shortages of capacity. This has led
to spiraling rates and a shipment backlog. This was welcome news to the beleaguered
carriers who had been hit with high fuel costs and low demand. In the last quarter of
2009 rates doubled and ended almost five times higher than the start of 2009.
Freight forwarders fared well during the first half of the recession, taking advantage of
abundant capacity to broker lower cost moves for their clients. By the second quarter in
2009, they too were feeling the impact of severely reduced volumes and rates with
nowhere to fall. Armstrong and Associates report that 3PLs lost ground in 2009 after
modest gains in 2008. The domestic transportation management segment was off 14.7
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percent, while the international segment fell 25.2 percent. The dedicated contract
carriage segment declined 15.2 percent in 2009 and the value added warehousing and
distribution services segment went down 0.7 percent. This market segment was less
concerned with asset utilization than the carriers, and profited from carriers who wantedbusiness at any cost. Many shippers are returning to their core carriers and repairing
relationships neglected during the recession. Tight capacity restraints in ocean, truck,
and air may push more shippers to engage 3PLs in the near term. Shipper related
costs rose 2 percent and logistics administration declined 18.5 percent.
Here is how the performance of our business logistics system looks for the last two
decades, between 1989 and 2009 (Slide 11). Inventory carrying costs as a percentage
of GDP declined about 52 percent in the last twenty years. Transportation costs as a
percentage of GDP is 19 percent lower than it was twenty years ago, but most of that
drop is in 2009. Again, let me reiterate that I expect the downward trend to return to
previous levels within two years.
Although GDP declined in 2009, logistics costs shrank even more (Slide 12). Looking at
the numbers we see that the growth in logistics cost has out paced the growth in GDP
prior to the recession, but GDP has risen faster than logistics costs throughout the
recession.
Looking Ahead
The best we can say for 2009 is that it is good that it is behind us. Lets look to the
future which is improving as each month passes. There are strong signs in the first half
of 2010 that the economy is recovering and most economists believe we have passedthe point where another drop in growth would cause a double-dip recession. Speaking
on CNNs State of the Union program, director of the White House Economic Council
Lawrence Summers said: the trend has turned, but to get back to the surface, weve
got a long way to go.That is a good summary of the path before us.
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Although indicators are moving upward we will still experience a drop or two along the
way (Slide 13).The GDP growth estimate for the first quarter of 2010 was recentlyrevised downward to 3.0 percent reflecting a downward adjustment in consumer
spending and an upward change in imports. The consumer spending revision caught
economists by surprise because the overestimation was in consumer spending onservices, not goods. Specifically, consumers didn't use as much housing, utilities, food
services, and accommodations as originally estimated. The downwardly revised
components are an indicator that consumers have not gotten much more comfortable
spending on dining out and traveling. The Conference Board Consumer Confidence
Index increased in May, its third consecutive monthly gain, although still weak by
historical levels. Consumer apprehension about current business conditions is
evaporating and being replaced with a gaining expectation for further improvement.
The Federal Reserve has been able to hold interest rates in check because inflation
has stayed low, coming in at just 2.2 percent in Aprila slight drop from March.
However, Atlanta Federal Reserve President Dennis Lockhart said last week that the
Fed may have to raise its key lending rate even though unemployment remains high.
Industrial Production has been steadily climbing since bottoming out mid-2009.
Manufacturing output climbed 1.0 percent in April for a second consecutive month and
was 6.0 percent above its year-earlier level. The increases in manufacturing were
broadly based across industries. Capacity utilization for manufacturing moved up 0.8 of
a percentage point to 70.8 percent, a rate 8.4 percentage points below its average from
1972 to 2009, but 5.7 percentage points above its low point in June 2009. The
production of consumer goods increased 0.2 percent, the result of higher output of
consumer nondurables. This sector has yet to see the growth necessary to boost the
economy. New orders for manufactured goods were up 1.2 percent in April,
considerably less than the 1.7 percent rise economists had expected. New orders have
been up twelve out of the last thirteen months. All of this months increase came from
the transportation sector, with a 228 percent increase in aircraft and parts orders, and a
2.7 percent rise in orders for new automobiles.
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Unemployment is one of the key areas of the economy that is not likely to turnaround
this year (Slide 14). Although jobs are being created, they are not increasing fast
enough to absorb those seeking jobs. New jobs are also attracting discouraged
workers to return to the labor market to seek employment, inflating the unemployment
rolls. During the recession there were tremendous gains in labor productivity. Althoughthe first quarter 2010 figures for productivity growth were recently revised downward to
an annualized rate of 2.8 percent, labor productivity has risen 6.1 percent over the past
four quarters. This rate of expansion is nearly three times the average rate of
expansion and the fastest growth since 2002. Productivity often increase at the end of
a recession as employers push workers to higher output levels to put off hiring new
workers. This productivity jump is good for raising the standard of living, but it has a
negative effect on jobs creation and contributes to rising unemployment. The for-hire
transportation industry laid off over 300,000 employees during the recession. Over 64
percent of those were in the trucking industry, which shed 15 percent of its employees.
In 2010 truck drivers are being hired at a very slow rate. Carriers are still setting high
standards and trying to hire experienced drivers. The rail industry has rehired workers
in every month in 2010, but is still down 20,600 workers. Air employment is rebounding
slowly with carriers still trying to wring more productivity out of their existing workforce.
Freight volumes have been generally on the rise in 2010 (Slide 15). Truck tonnage has
grown over 6.5 percent in the last seven months. Truck shipments are picking up in
most market segments and there are already reports of equipment shortages. Rates
still have not taken off. Rail carloadings have been somewhat disappointing as we
entered 2010. Weather played a significant factor in the first few months of the year,
with the snowstorms in the northeast contributing to the loss in February. Rail
intermodal loadings have also been depressed, again suffering from the impact of the
weather. Railroads have experienced enough growth in business to begin rehiring
workers and taking freight cars out of storage. In May, freight cars in storage
represented 23.8 percent of the fleet down from 28.7 percent in January. Port traffic
has recovered somewhat in the first few months of 2010. Global Port Tracker has
forecast that TEUs will be up 25 percent for the first half of the year over levels just a
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15
year ago. Rates are up almost 60 percent in some markets and there is little room to
negotiate with ocean carriers who are standing firm in order to recover from rock
bottom rates in 2009. The air cargo industry has experienced a great resurgence in
2010, with international traffic growing at a 26 percent annualized rate in the first
quarter and domestic traffic rising at about half that rate. April international figuresdeclined 0.5 percent because of the shutdown of European air space in response to the
volcano eruption. Shipments are up primarily on the strength of semi conductor
shipments. The industry trimmed inventories and needed a quick response when
demand returned. Shipments are expected to drop off soon as inventory levels get
more in line with sales. The revenue picture for air cargo carriers has rebounded from
the very disastrous first quarter 2009 results, but still remains about five percent below
pre-recession levels.
Summary
Summarizing, US business logistics costs were equal to 7.7 percent of nominal GDP in
2009 and dropped down to $1.1 trillion (Slide 16). Transportation costs declined 20.2
percent, while Inventory carrying costs fell 14.1 percent. Transportation costs now
account for 4.9 percent of nominal GDP, while carrying costs account for 2.5 percent.
Interest rates, which plummeted in 2009, combined with lower inventories to push down
logistics costs. Trucking sector costs comprise about half of all business logistics cost.
This sector has been hit particularly hard by the recession and fell 20.3 percent in
2009. The other modes combined posted a combined 20.5 percent drop.
Capacity continued to exit the industry in 2009, particularly in the trucking segment.
The rail, air, and ocean sectors laid up equipment at rates not seen in decades. The
trucking, ocean, and air industry also permanently disposed of assetseither sellingthem as scrap or selling them in the second-hand market. Investment in new capacity
all but dried up during the recession and is just now starting to pick up again. We can
expect some capacity restraints by year end, with both equipment shortages and driver
shortages.
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16
The railroad industry has abundant capacity and can readily bring it and workers back
on line as demand grows. The ocean carrier industry is still way over capacity and will
continue to increase capacity as new ships are delivered. They are using artificial
means to constrain capacity to shore up freight rates. Unfortunately this has resulted in
longer shipping times and less delivery time reliability. The air cargo industry removedmuch excess capacity and is already seeing some backlog in shipments. While there is
parked capacity available, much of it is smaller, older aircraft. It will take time to rebuild
and the industry is waiting to be certain that growth rates are sustainable before
investing. The capacity in the trucking industry is now much more in line with demand,
but as demand grows, there is not sufficient parked capacity to quickly respond. There
is a large inventory of used trucks which could be picked up, but tight credit is going to
hamper large investments in new trucks. Truck drivers will also be in short supply.
For those that have survived the recession, the future looks bright. For those that have
emerged in a seriously weakened state your future will depend on your ability to
capitalize on growing market opportunities to bolster your position. Capacity is going to
tighten and rates are going to rise. Shippers would be wise to be first at the table
negotiating rates and capacityguarantee a minimum level of business in return for
guaranteed carriage or limited rate hikes two or three years out. Consider offering
assistance (perhaps in the form of new terms) to weaker links in your supply chain to
ensure their survival. To repeat the observation made earlier, we are on our way up,
but far from breaking the surface. We need to continue to mind the bottom line and
keep costs in check.
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21st Annual State of Logistics Re
The Great Freight RecesNational Press Club
Washington, DC
,
Rosalyn Wilson
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US Business Logistics Costs
1.39
1.01 0.97 0.951.03
1.18
1.31 .
.
Trillio
ns
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The US Business Logistics System Cos.
$ Billio
Carrying Costs - $1.851 Trillion All Business Inventory
InterestTaxes, Obsolescence, Depreciation, InsuranceWarehousing
5233119
Subtotal 357
Motor Carriers
Truck IntercityTruck Local
368174
Subtotal 542
Other CarriersRailroadsWater (International 25, Domestic 4)Oil PipelinesAir International 14 Domestic 15
50291029
Forwarders 28
Subtotal 146Shipper Related Costs 9
2
TOTAL LOGISTICS COST 1,09
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Logistics Cost As A Percent of GD
10.39.5
8.8 8.6 8.89.5 9.8 9.9 9.3
2000 2001 2002 2003 2004 2005 2006 2007 2008
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Total US Business Inventories
2300 Billions of Dollars
1900
2100
1700
1300
1500
Recession Dates: 3/1/2001 to 11/1/2001 and 12/1/07 to 7/1/09
Source: US Department of Commerce, Census Bure
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The Inventory to Sales Ratio Has Retu-
1.50
1.40
1.45
1.35
1.25
.
.
2000 2001 2002 2003 2004 2005 2006 2007 200
Source: US Department of Commerce, Census Bure
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US Average Commercial Paper Ra
7Billions of Dollars
5
6
3
4
Perc
ent
1
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Board of Governors of the Federal Reserve Sy
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The US Business Logistics System Cos.
$ Billio
Carrying Costs - $1.851 Trillion All Business Inventory
InterestTaxes, Obsolescence, Depreciation, InsuranceWarehousing
5233119
Subtotal 357
Motor Carriers
Truck IntercityTruck Local
368174
Subtotal 542
Other CarriersRailroadsWater (International 25, Domestic 4)Oil PipelinesAir International 14 Domestic 15
50291029
Forwarders 28
Subtotal 146Shipper Related Costs 9
7
TOTAL LOGISTICS COST 1,09
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Number of Truck Drivers vs Freight C
115.0Drivers
110.0
100.0
.
95.0
.
2000 2001 2002 2003 2004 2005 2006 2007 200
Source: Bureau of Labor Statistics, Bureau of TransportStatistics, and author estimates
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US Ports Lose Ground in 2009
Ports 2009 2008 2007 2006
Los Angeles 5,028,998 5,670,897 5,740,261 5,743,400
Long Beach 3,765,560 4,611,671 4,994,949 4,798,617
New York 3,587,740 3,992,258 3,935,262 3,678,247
, , , , , , , ,
Oakland 1,398,420 1,394,684 1,451,326 1,414,782
Norfolk 1,375,632 1,591,566 1,573,273 1,424,993
Houston 1,256,049 1,370,759 1,415,657 1,295,366
Seattle 1,072,838 1,082,573 1,289,364 1,222,596
,SC
954,836 1,330,919 1,408,434 1,517,311
Tacoma 873,708 1,129,301 1,150,590 1,095,896
Source: Journal of Commerce PIERS Database, measured
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Monthly Tonnage Indicator for Internal W
55
50
40
45
35
30
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: US Army Corps of Engineers, Navigation Data C
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Index of Logistics Costs as a Percent o-
110Inventory Transportation
90
US Recessions
70
dex198
5=10
50In
30
1990 1995 2000 2005
11
Recession Dates: 3/1/2001 to 11/1/2001 and 12/1/07 to 7/1/09
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GDP Growth and Logistics Cost Gro
GDP Logistics
2005 2006 2007 2008 20
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Looking Ahead
Real GDP estimate for the first quarter of 2010 was
downward recently to 3 percent, following a fourth q2009 estimate of 5.6 percent
Inflation rate remains low at 2.2 percent in April 201cost of living declined .1 percent in April as well
10
-
0
5 Industrial Production
-15-10
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09
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Looking Ahead
Unemployment rose again to 9.9 percent in April 20
expected to decline in May
2010 and initial jobless claims are tapering off
The For-hire transportation industry has lost over 3,
Air (includes passenger) 20,100 50,
Rail 17,200 20,
Water 400 9,8
Truck 109,000 216
Pi eline 1 800 2 0
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Looking Ahead
2.00
nge
2010 Truck Tonnage
4.5
ge
2010 Rail Carloa
0.00
0.50
1.00
.
PercentCha
-1.5
0.0
1.5
.
PercentCha
Jan Feb Mar Apr Jan Feb
Source: ATA Truck Tonnage Index, SA Source: AAR RailTime Ind
0.0
1.5
3.0
Change
2010 Rail Intermodal
1.05
1.10
TEUs
2010 Container
-4.5-3.0
-1.5
Jan Feb Mar Apr
Pe
rcent
0.95
1.00
Jan Feb
M
illion
15
Source: Global Port TrSource: AAR RailTime Indicators, SA
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Summary
2009 Logistics Costs fell to $1.1 trillion
. the lowest level recorded to date
ransportat on costs roppe 20.2 percent an now
for 4.9 percent of nominal GDP all modes droppesubstantially
Inventory carrying costs declined 14.1 percent andaccount for 2.5 percent of nominal GDP both decinventories and lower interest rates contributed
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