Author’s note: This summer brings the latest update on the health of U.S. logistics. While some may quibble with its details, the “19th Annual State of U.S. Logistics Report” generally is regarded as an accurate barometer of what the nation is experiencing. Moreover, many companies use this study as a benchmark.

For almost 15 years, the late Bob Delaney developed and delivered the report, which often carried his name among logistics practitioners. Since Delaney’s death in 2004, his former assistant, Rosalyn Wilson, began handling the report.

My first inclination was to title this piece, “Surviving the slump.” But I realized, perhaps, it should be amended to say we’re “surviving a continued slump” - considering that we have seen a steady climb in logistics costs during the past four years. Unfortunately for everyone, there are no signs of this trend abating. At first glance, a review of the year-over-year impact on the economy is fairly minimal. In 2007, logistics costs represented 10.1 percent of Gross Domestic Product (GDP) compared to 9.9 percent in 2006.

However, the worrisome aspect is that in 2003 - when logistics as a percentage of U.S. GDP hit its lowest point -this cost was only 8.6 percent. This means that logistics as a percent of GDP has increased over 17 percent since that time, and has far outpaced the growth of the economy as a whole. This means that our nation is becoming less efficient in logistics and thus is eroding bottom-line results at many companies.

In light of skyrocketing diesel costs, reports of carrier failures and fuel surcharges, I’m surprised there was only a 5.7 percent rise in transportation costs. Candidly, I expected transportation to have the largest increase of any cost segment. But “Inventory Carrying,” “Other Carriers” (including air, forwarders and railroads) and “Administration” all grew at significantly faster rates. What this appears to indicate is that many companies were caught off guard by the speed at which the economy slowed. In other words, they couldn’t shut off production as fast as sales declined. The end result was that business inventories increased 8.7 percent in 2007 and further increased 3.7 percent in the first quarter of 2008.The magnitude of inventory increase - more than 12 percent in five quarters - has to be an issue for many chief executives and chief financial officers. Looking forward, this inventory bubble must be “worked off” before the economy can really ramp up new production.

Apparently, corporate America saw the cost issues and tried to respond by adding more logistics people and systems. This is reflected by the 8 percent increase in administrative costs. One has to wonder what the result would have looked like if the administrative investments had not been made.

In a previous writing about 2005, I noted, “logistics costs are up and probably headed higher.” In hindsight - although I was directionally correct - I clearly underestimated the rate of increase. And today, unfortunately, I must pass along the same admonition. If logistics costs can be held at 10.1 percent of GDP in 2008, in my opinion, it will be a minor miracle.

So what does all this mean for members of the refrigerated and frozen food supply chain? Here are six observations:

1. Everyone will be impacted by the same cost pressures. No business will be immune to higher fuel costs and larger inventories. Moreover, the temperature-controlled sector bears the added burden of more expensive fuel for refrigeration units. This will push costs even higher in this segment.
2. The days of cheap energy - which have been a long-term underpinning of the U.S. economy - are gone. In fact, it is more likely that oil costs will escalate rather than decrease. So, we all have to learn to live with higher cost oil (which much of the world has done for years).
3. Cheap oil has contributed to many years where logistics costs were either declining or (at worst) holding steady as a percentage of national sales. As a result, shippers did not have to employ top-shelf talent to get satisfactory transportation cost control. Today, however, it is imperative that transportation management departments get the best people available. Carriers now employ sophisticated cost tracking and pricing methodology programs. For that reason, we think that it’s useless to simply pound a carrier for lower rates. Today’s shipper has to find ways to help the carrier take out costs before rates can be reduced.
4. There is no magic bullet for cost control. What separates leaders from laggards is continued, relentless pressure across all fronts. Aberdeen Research reports that best-in-class companies (those in the top 20 percent) actually reduced transportation and warehousing costs by 3 percent in 2007 while laggards (the bottom 30 percent) saw 10 percent cost increases in the same areas. Interestingly enough, not all best-in-class companies are industry giants. Many smaller firms also have figured out how to become more efficient.
5. Because our firm consults with many food companies, we can attest that best-in-class firms are much more focused on cost control and are willing to undergo change to reach that goal. One example I can offer involves packaging optimization because it has a direct link to freight costs. We recently changed a shipping case configuration, which enabled a client to get 20 percent more product on each pallet and outbound truck.

Typically, we tell clients that the more receptive they are to managing change - the more we can help them drive down costs. Unfortunately, clients often restrict us to shipping case configuration revisions - without changes to product counts. On the other hand, the client I just mentioned told us that they would consider any path to cost reduction, including count changes and retail pack adjustment. That kind of flexibility is rare but can generate outstanding bottom line improvements.

6. If ever there was a compelling reason to focus on industry collaboration, I’d say that this period of rapid cost escalation would be that call to action. This means working more closely with both customers and suppliers for mutual benefit. Some alternatives would be ordering less often to get larger deliveries, pooling freight with others and collaborating for joint purchases. In fact, we have seen direct competitors buy in joint shipments to secure lower costs.

As mentioned earlier, I went back to some of my 2005 writings and analysis about the state of the logistics industry. When I recapped the Delaney report two years ago, my message was that the industry was facing “a whole new ballgame.”By today’s standards, I suppose that “the game” hasn’t changed much in that time. However, it certainly has become more difficult.

Logistics cost breakdown (in $ billions)

Cost                          2006      2007    % Change
Transportation          $635    $671    5.7
Inventory carrying    $446    $487    9.2
Other carriers            $166    $177    6.6
Shipper related         $8         $8         -
Administration           $50       $54     8.0

Source: 19th Annual State of U.S. Logistics Report, Council of Supply Chain Management Professionals

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The annual “State of Logistics Report” is sponsored by The Council of Supply Chain Management Professionals (CSCMP), Lombard, Ill. For more information about the report, contact Jessica D’Amico, CSCMP research project coordinator at jdamico@cscmp.org or call (630) 645-3460.