Logistics Costs Skyrocket
Katherine Doherty -- http://www.foodlogistics.com -- November 7, 2006
Logistics costs reached an all-time high in 2005, according to the 17th Annual State of Logistics Report, a result of soaring fuel costs, strained capacity, driver shortages and the costs of meeting security requirements.
The survey was released by the Council of Supply Chain Management Professionals (CSCMP) and I was fortunate enough to see Rosalyn Wilson present the report, Embracing Security as a Core Business Function, for the New York City chapter of CSCMP last month. Wilson, a consultant for Reality Based IT Services, produced the report and worked with the late Bob Delaney, the original author of the report, since 1994.
Wilson painted a bleak picture of the U.S. logistics landscape, pointing out that logistics costs rose from 8.8 percent to 9.5 percent of the nominal gross domestic product. This was an increase of $156 billion over 2004, nearly double that year’s rise and the largest year-to-date change in more than 30 years.
“Although I had predicted that we would continue to see increases in most logistics components, I didn’t anticipate such a dramatic rise,” she says. “Logistics costs have gone up over 50 percent during the last decade. Transportation costs, mostly trucking, accounted for much of the increase. Transportation costs jumped 14.1 percent over 2004 levels and inventory carrying costs rose to 17 percent in 2005, the highest level since we began measuring.”
While demand for trucking services was strong last year—and tight capacity allowed truckers to raise rates—costs rose faster than rates, eroding some of the gain. Obviously, rising fuel costs had the biggest impact. The trucking industry spent $87.7 billion for diesel in 2005, up from the $65.9 billion in 2004, says Wilson, and the ATA predicts diesel costs for 2006 will be more than $94 billion.
Traffic congestion got worse—which means more trucks sitting idle in traffic jams—and the cost of insurance for truckers skyrocketed. A shortage of drivers and the hours-of-service rules made matters worse, as has the aging of fleets. “Purchases of new equipment have been on the rise,” says Wilson, “but most of the purchases are for replacement, not added capacity.”
And the future isn’t looking much brighter. Wilson cited a study by the Federal Highway Administration that found that the volume of freight traffic on U.S. roads will increase 70 percent by 2020. “Truck miles traveled on U.S. highways have nearly doubled in the last 25 years,” says Wilson, “and yet we increased roadway capacity by only 5 percent. We are not keeping pace with the need.”
Wilson also takes issue with the lack of security in transportation and logistics systems. “More disruptions—terrorism, political upheaval, natural disasters and other large-scale disruptive events—are occurring more frequently,” she says.
“A knowledge of risks leads to better decisions about risk mitigation vs. risk acceptance, which, if properly measured, can create value for the firm through its use as a market differentiator,” says Wilson.