17th Annual State of Logistics Report

17th Annual
State of Logistics Report
Sponsored by the Council of Supply Chain Management Professionals
Embracing Security as a Core Business Function

June 19, 2006 Ronald Reagan Building, Washington, DC
Presented by Rosalyn Wilson P: 703-404-4362 F: 703-430-6430 E: Rosalyn@transopolis.com
Introduction
During 2005, the U.S. economy slowed slightly from last years pace, while the growth in its business logistics system was unparalleled. Our business logistics costs were $1,183 billion and rose from 8.8 to 9.5 percent of our nominal Gross Domestic Product (GDP). This is an increase of $156 billion over 2004, almost double last years rise and the largest year-to-year change since we started this model. (Figure 1) This level is also an all-time high for logistics costs. It represents an increase of 15.2 percent over 2004. The overall economy continued to expand in 2005 as growth occurred in almost every sector. Freight volumes climbed higher than the previous record level. Domestic freight transportation, in terms of tons of freight transported, has grown over 20 percent in the last decade and is expected to increase another 65 to 70 percent by 2020. Growth in international shipments is predicted to outpace the expansion in domestic shipments, with some estimates pegged above 85 percent. Although I predicted that we would continue to see increases in most components of our business logistics mode, I had not anticipated such a dramatic rise. I also said that logistics as a percent of GDP would begin to approach the 10 percent mark again. Despite the rise in 2005, logistics as a percent of our nominal GDP remained below 10 percent. (Figure 2) Given stillsoaring fuel costs, continued capacity pressures, record levels of truck driver shortages and turnover, and the expected costs of meeting security requirements, logistics costs have continued to rise into the first several quarters of 2006. With interest rates on the rise, and indications from the Federal Reserve that they have not peaked, the economy is expected to slow somewhat. Higher transportation costs and higher inventory carrying costs will combine with
17th Annual State of Logistics Report
moderating growth in the overall economy to produce double digit logistics as a percent of GDP figures in 2006.
Agenda
Here is the agenda. First I will examine in detail the cost of the U.S. business logistics system in 2005 in twelve line items of detail. I will review the trends in transportation costs, inventory carrying costs, and total logistics costs since 1984. Next, I will present the results of a study undertaken by the US Department of Transportation last summer that analyzed the methodology for the State of Logistics Report. (Figure 3) Surviving and prospering in todays global economy requires resiliency or the ability to react quickly, decisively and appropriately to rapidly changing circumstances, and to withstand the effects of disruptive events, such as weather-related catastrophes and terrorism. For the last part of this report I am going to examine the state of the U.S. logistics system and, looking into the future, the level to which companies and their supply chains are prepared and resilient enough to respond to the difficult scenarios they may face. For instance, what are the implications for supply chain managers of the rise in and sustained higher price of fuel? How have shippers, especially retailers, responded to the congestion and capacity issues the industry has experienced with the explosive growth in imports? What short term and long term plans are being made to mitigate future problems? I will take a look at the challenges we will be facing in the next decade, including the looming crisis in transportation system capacity, our growing critical infrastructure needs, increased competition for goods and services from emerging third world nations, rising costs for off-shore production, and security issues.
The Business Logistics System 2005

During 2005, the cost of our business logistics system increased to $1,183 billion, or the equivalent of 9.5 percent of nominal Gross Domestic Product (GDP). Logistics costs have gone up over 50 percent during the last decade. This is a year of record highs for many of the components of the model. Transportation costs, mostly trucking, accounted for much of the rise in 2005. Transportation costs jumped 14.1 percent over 2004 levels, and 77.1 percent during the past decade. Inventory carrying costs rose to 17 percent in 2005, the highest level since we began measuring. The increase was due to both significantly higher interest rates than last year and a rise in inventories. The average investment in all business inventories in agriculture, mining, construction, services, manufacturing, wholesale and retail trade was $1.76 trillion, surpassing last years record high by $116 billion. (Figure 4) Inventories have slowly crept up, reversing the trend to leaner inventories. This is a response to longer and sometimes unpredictable delivery times, as well as changes from mega-warehouse distribution centers to smaller distribution centers spread throughout the system. It will be interesting to see if rising interest rates slow down inventory buildups as manufacturers and retailers continue to adapt and respond to changing environmental and cost pressures. I believe that the trend will slow down for several reasons. Interest rates are a critical element, of course. The second is the response of manufacturers and retailers as they refine their supply chains to mitigate uncertain delivery times, add new sources of supply, and become more adept at shifting existing inventories to where they are most advantageous. On an annualized basis, the value of all business inventory has risen every year since 2001. The cost of carrying inventory during 2005 includes interest at the annualized commercial paper rate of 3.3 percent, a significant jump from last years 1.4 percent. Monthly commercial paper rates have been steadily on the rise throughout all of 2005 and have gone up an average of 4.6 percent for the first
four months of 2006. (Figure 5) The cost of taxes, obsolescence, depreciation and insurance follow the Alford-Bangs Production Handbook formula that has been used in this methodology since its publication in 1973. The cost of warehousing was up substantially in 2005 based on expenditures for public warehousing reported by the Commerce Departments Census Bureau and corroborated by several other studies. According to ProLogis, a leading global provider of distribution facilities and services, the warehouse leasing market continued to be tight in 2005. They reported that vacancy rates dropped to 7.3 percent at year-end 2005 from a high of 9.7 percent the year before. In addition, burgeoning demand has led to higher rents, which increased an average of 5 percent in 2005. New warehouse construction has risen also, a sign that investors have confidence that the market will continue to grow. (Figure 6) Transportation costs are calculated using the methodology that has been used since the inception of this report. Trucking costs increased by $74 billion compared to 2004. Demand for trucking services was strong in 2005, and tight capacity enabled trucking companies to raise rates. Costs rose faster than rates, however, eroding some of the gain. Traffic congestion worsened adding extra time and higher fuel expenditures to the bottom line. The cost of insurance for truckers, measured by the average bodily-injury and physical damage deductibles for 12 prominent publicly held companies, rose from $2.7 million in 2004 to $3.2 million in 2005. For comparison, the deductible in 1999 was only $443,000. Although purchases of new equipment have been on the rise, most of the purchases are for replacement, not added capacity. The trucking fleet on averaged has aged over the last decade and old equipment must be replaced. The driver shortage worsened substantially in 2005. As the economy flourished, the availability of drivers became a limiting factor in the quest to add capacity. The hours-of-service rules for drivers have had a negative impact by reducing the capacity of an individual driver. The American Trucking Association (ATA) has estimated that the driver shortage will grow to 111,000 by 2014, and companies
have responded by offering more lucrative hire packages. The lure of better benefits and referral bonuses has led to drivers jumping from company to company. Indeed, the ATA states that the average turnover rate in 2005 for larger truckload carriers was 130 percent, the highest turnover rate recorded. Even small truckload carriers are feeling the pinch with turnover rates up 18 percent from the second to the fourth quarters of 2005. Ozark Motor Lines says that it spends about $5,000 to recruit each new driver. It enjoys a better than industry average retention rate, with a turnover rate of only 65 percent. However, the costs add up quickly as Ozark estimates that recruiting the 495 drivers it hired in 2005 cost the company about $2.5 million. Ozark also opened a new $1 million Driver Service Center as a differentiating perk to attract and retain drivers. It offers many amenities such as showers, a laundry facility, computers with Wi-Fi Internet, lounge areas with televisions, and a fitness center where drivers can exercise after a long day on the road. They expect the center to provide services for at least 50 drivers a day. In addition truck drivers can also refuel right outside the center. (Figure 7) Diesel fuel prices continue to climb. The trucking industry spent $87.7 billion for diesel in 2005, a big jump over the $65.9 billion spent in 2004. Further, the ATA predicts that the diesel charge for 2006 will be over $94 billion. The U.S. trucking industry consumes more than 650 million gallons of diesel per week, making it the second largest expense after labor. (Figure 8) Costs of transportation by rail jumped 14.3 percent, with revenues for Class I railroads up 13.8 percent. High demand has kept the railroad industry operating at near capacity all year. In order to meet the surging demand for railroad services the U.S. freight railroads are expected to hire 80,000 new workers by 2012.
Maritime and domestic water traffic increased by $2 billion during 2005, with substantial growth in ocean freight. Larger capacity ships and wider availability of shipping capacity have been expected to push rates down, but there was little evidence of that in the figures yet. We continue to struggle with port capacity problems, both in terms of available berths for unloading and throughput constraints which slow down delivery. Oil pipeline transportation was up slightly, but the effect is lost in rounding at the high level we show. Airfreight increased by $6 billion during 2005, an increase of 17.6 percent. Along with the growth in revenue came skyrocketing expenses. Fuel is the big story as the industrys fuel bill rose to $91 billion and is forecast to continue to grow to over $110 billion in 2006. In 2003 fuel represented about 14 percent of operating expenses and in 2005 the percent had grown to 22 percent. Domestic freight forwarder revenues, after payments to line haul carriers, also increased $14 billion. Shipper-related costs combine the loading and unloading of transportation equipment and the operation of traffic departments. Logistics administration is imputed at 4 percent of total logistics costs following the methodology that we have consistently employed since its publication in 1973. Here is how the performance of our business logistics system between 1984 and 2005 appears graphically, with 1985 serving as the base. Inventory carrying costs as a percentage of GDP declined about 40 percent. Transportation costs as a percentage of GDP declined by 8 percent and total logistics costs declined by 23 percent. Logistics costs as a percentage of nominal GDP have remained below 10 percent for a fifth straight year, but have increased by over 25 percent in the last two years. (Figure 9)
The State of the U.S. Logistics System

The remainder of the report will focus on the challenges of surviving and prospering in todays global economy. The first major issue is that of deteriorating critical infrastructure. The physical transport network, the roads, rail lines, ports, airports, freight yards, etc. is the backbone of our nations freight system and economy. Its continued health or lack thereof will determine our position in the global economy and we are losing ground. In the past, the US has set the standards for freight system design and management, but we have lost ground over the last decade or so. We have not made sufficient investment to maintain and improve our aging transportation system and it can no longer meet the needs of the record setting growth in freight flows. We face capacity constraints at virtually all major freight gateways and congestion and bottlenecks throughout the system as it approaches full capacity. It is it is no longer a question of if we will reach a crisis point, but when. The American Society of Civil Engineers Report Card for Americas Infrastructure gave the nations freight transportation system a dismal D +. If we do not respond with immediate and long-term investment in our nations transportation infrastructure we will begin to experience regular failures in the system. One of the critical areas of need given the expected growth in international trade is our ports. Many of our ports are over fifty years old and are showing signs of neglect and obsolescence. While we have done little more than maintain our ports, ports throughout Asia and Europe have become more modern and efficient. This has a direct impact on our competitiveness in the global economy because failure at any one of the major U.S. ports could potentially cripple our freight system. It has been widely quoted that we need to add capacity equal to the Port of New York and New Jersey every year to cope with a projected growth in import volume over the next several decades. (Figure 10)
Our ports system has come close to reaching the saturation point. The World Shipping Council estimates that over 800 ocean freight vessels make over 22,000 calls at U.S. ports every year, or over 60 vessels a day at the nations 145 ports. Up until 2004, only three North American ports, Los Angeles, Long Beach and the Port Authority of New York and New Jersey, handled 2 million or more cargo containers annually. Since then four more ports have reached that level. A 2005 analysis of container port capacity by Pennsylvania State University professor of supply chain management Michael Maroni concluded that there isnt enough excess capacity system wide now across all the ports to handle any breakdown at any large port. Another major issue with our harbors and ports is that many have narrow navigation channels and shallow harbors that dont permit access by deep draft vessels which are becoming predominant in the worldwide fleet. Cargo ships are now even larger than their predecessors. As our trading partners build port facilities to handle these ships we place ourselves at a competitive disadvantage. Many east coast ports, for example, cannot even handle the oil supertankers that are predominant today. Recognizing that in the short term these problems cannot be fixed because maintenance and expansion of navigation channels is a lengthy, complex and costly process, the time for decisive action and leadership is now. It took 20 years from conception to actually beginning the work on the Port of Oaklands channel deepening project. We do not have that kind of time! Many ports also suffer from congested truck and rail access routes, and sever space limitations on available land around ports. There are projects which could help mitigate these problems in the near-term. Many ports have announced or even started on near-term plans to add terminals, modernize equipment, improve feeder roads, and add labor. At the Port of Charleston, where 25 percent of the volume comes from Asia, they are installing new cranes and other equipment to allow containers to be stacked higher. Additionally shippers have shifted their patterns to alleviate some pressure.
To avoid the congestion and capacity issues plaguing the west coast in recent years, shippers have diversified to other points of entry, adjusted shipping schedules and extended buying seasons. Ports and railway operators hired thousands of additional workers and trucking and rail companies have added new equipment to the fleet. Several posts have made some extensive operational changes which included extending cargo terminals hours on nights and Saturdays, instituting peak hour fees on cargo loading, and the installation of productivity and security enhancing technology solutions. A number of ports also have some major construction projects underway aimed at relieving congestion and increasing throughput. The near-term solutions are necessary to allow us to tread water, but they are not enough. Soon the east coast will experience capacity and congestion problems similar to those on the west coast. In addition what is being planned will not come on line to meet the demand. What is necessary is strong leadership to identify priorities, develop and commit resources, and implement a comprehensive plan for investment in much-needed upgrades to existing infrastructure and building of additional capacity. The dramatic growth in the volume of freight moving in our logistics system has severely strained the transportation network in some locations. The increase in international trade has placed mounting pressure on the initial points of entry the gateways, ports, airports, and border crossingscreating bottlenecks for the movement of freight. Further the successful movement of freight is very dependent on what happens beyond the ports along the nations highways, inland waterways, railroads, warehouses and distribution centers, container yards and terminal facilities. These are the systems choke points and are responsible for chronic delays resulting in a huge economic cost. Landside access to U.S. ports, congestion on highways around major gateways, delays at
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border crossings, and congestion at major east-west rail interchanges affect the efficient movement of goods from, to, and within the United States. The burden for addressing and solving the problems are often shouldered by local communities which do not have the resources and influence to effect large scale changes or solutions. As is obvious, this is a prime example of why we need national leaders to formulate a comprehensive nationwide plan to address the myriad of problems with the intermodal freight system beyond the points of entry. According to the FHWA, the volume of freight traffic on the U.S. road system will increase 70 percent by 2020. Truck vehicle-miles traveled on US highways have nearly doubled in the last 25 years. We have increased roadway capacity in the form of new roadway lane-miles by only 5 percent. We are not keeping pace with the need. Also by 2020, the highway system will have to carry an additional 6.6 billion tons of freight an increase of 62%. Traffic congestion, as we can all attest to, has gotten worse. A study done by the Texas Transportation Institute (TTI) shows that congestion is costing Americans at least $63.1 billion a year (in 2003, the latest number available). If 2005s higher fuel prices are added, the cost jumps another $1.7 billion. In its 2005 Urban Mobility Report, TTI put a price tag on the value of extra travel time (or delay), and the extra fuel consumed by vehicles of $72.65 per truck-hour in 2003. (Figure 11) Worsening highway congestion requires investment in freight improvements to meet the needs of the nation's transportation network. The FHWA estimates that it will take an annual expenditure of $75.9 billion through the year 2020 just to maintain the physical highway infrastructure. Railroads move about 50 percent of all international cargo in the U.S., and it is expected to double its current level by 2025. Despite heavy investments in recent
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years in equipment and additional labor, average train speed is falling. Slower trains mean higher costs and more congestion. The rail freight network was rationalized shortly after the passage of the Staggers Act in 1980 and is now about one half the size it was prior to 1980. The leaner system is more productive however, and carries almost double the number of ton-miles the old system carried. We have already witnessed service and capacity delays on the rail system at some locations and on some rail corridors, particularly those feeding the western ports. Meeting the future demand will require an increased network capacity in the form of physical expansion of the infrastructure. We need to invest large amounts of capital to construct multi-tracking key corridor routes and add passing side tracks. Further, we need to work on plans to alleviate the choke points in congested urban areas and replace grade crossings that impede the average speed of a train. These interchanges are located through the mid-section of the country in major urban areas for which they were not originally designed. Major investment is needed to create high speed rail freight corridors with grade separated rail crossings to alleviate highway congestion and improve efficiency and safety. This investment will largely need to be private. Investment in rail projects will also relieve congestion at ports and on highways. Installation of on-dock rail terminals like the recently completed Express Rail Elizabeth at Port of NY/NJ dramatically increase the efficiency of rail and reduce the reliance on short haul truckers. Funding should be directed to facilitating more of these terminals to capitalize on the benefits of using rail to move freight form the docks. The primary benefit is the reduction in highway congestion. The nations waterway system needs to be revitalized and used more heavily to further impact congestion problems. Water transportation could become a vital resource to meet the nation's freight demands. Although it is not very prevalent now, waterways could even handle containers. Careful planning should be done
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to ensure that the waterways are poised to handle more freight and that all of the support infrastructure is present to make the use of the waterways efficient. In a recent article I wrote for World Trade Magazine, I pointed out that our infrastructure needs have become so dire and funding so scarce that we cannot afford to make spending decisions in a vacuum. It is going to take strong leadership to make the tough decisions and see the projects through. Much of the public funding available for infrastructure improvements is under the ultimate control of local and regional transportation authorities and governments. While no one disagrees that such entities are in a position to evaluate the infrastructure needs of facilities in their locale, it is critical that the decision-making process become more focused on a total system approach. (Figure 12) To ensure the success of the industrys efforts and to make maximum use of resources, there needs to be leadership on a national level. Investment decisions should be made to maximize the benefits of improvements that will reduce the bottlenecks and the freight exchange points throughout the system in the next three years. This includes projects dockside and throughout the system such as improved highway and rail port connectors, more dedicated freight corridors with grade separations or truck-only lanes, better use of terminals and freight hubs, relocation and diversification of distribution centers, encouraging the use of alternative landing points and building up the local infrastructure to ensure that this does not simply shift the congestion choke points. (Figure 13) This will take leaders with vision. Last years report focused on the issue of security and the conclusion was that the transportation and logistics systems were not passing the test. This year I would like to propose that the solution to logistics security should be fundamentally brought home to each and every player in the supply chain. (Figure 14)
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Are terrorism, political upheaval, natural disasters, accidents and other largescale disruptive events happening more frequently, or are they just having a more significant impact than in previous years? The answer is yes more disruptions are occurring and are having a more significant impact. There has been a significant rise in the number of international terrorist incidents over the past decade, and at the same time, severe weather that strikes anywhere on the globe is now more likely to threaten far-flung global supply chains, meaning that more incidents of more significance are occurring. There are three reasons why this is occurring. First, the competitive forces of the global free market which dictate that business processes be carried out by the lowest-priced provider wherever they may be located increases the complexity and diversity of a firms supply chain. Second, the interconnectedness and mutual dependencies of global critical infrastructures such as ports, highways, railroads, airports, telecommunications links, and power plants, coupled with the advent of lean business processes that minimize standing inventories increase the collective risk from what would once have been relatively minor disruptions. And lastly, the continual threat of disruptive events, such as severe weather, political upheaval and terrorist attacks in the globalized and interconnected world can severely disrupt normal patterns and cause changes in the free flow of goods. Today, adverse events actually are more likely to happen as an outgrowth of the interplay among these three factors and are more likely to have wider-ranging effects as well. With each piece of the global transportation network increasingly tied to every other part, the cascading impacts from adverse events can now extend further than ever before. Noted enterprise vulnerability and business resiliency expert Yossi Sheffi calls this phenomenon the high frequency of rare events, explaining that, while the likelihood for any one event that would have an impact on any one facility or supplier is small, the collective chance that some
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part of the supply chain will face some type of disruption is high. And with the increased likelihood comes increased severity. (Figure 15) The best approach for firms faced with such pervasive and potentially existential risk is to work through a framework that manages security as a core business function and integrates security prerogatives across all the activities of the enterprise. Doing so creates opportunities to create value in new and significant ways that include everything from cost savings from improved business processes and reduced theft and from better asset management to enhanced brand equity or improved preparedness for catastrophic loss. This holistic approach gives your company the ability to turn security from a net cost into a net benefit. This broad-based approach focuses on developing and implementing comprehensive risk management and security best practices for a firms entire supply chain. It involves working with key internal and external stakeholders to ensure the use of a comprehensive approach to securing fixed assets, assets in transit, brand equity/goodwill, and human capital. Cargo container security ranks as one of the top concerns among transportation executives at all global import and export companies, regardless of size. The shipment of containers may represent the greatest security risk in our cargo supply chain. Over 70 percent of general cargo travels in containers today. In 2005 over 11 million loaded cargo containers, representing about $1.5 billion worth of goods daily, were imported into the U.S. Growth rates of over ten percent are projected for the next several years, resulting in a projected over 13 million containers by 2007. This represents over 13 million discrete opportunities for something to go wrong. Securing goods in transit has a number of bottom line business impacts. If properly implemented, the risk of a major catastrophic failure of the global transportation network resulting from an act of terrorism can be reduced. Insurance costs can be driven down when pilferage and fraud are reduced, and
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corresponding claims decrease. The cost associated with compliance for a growing number of government regulations for freight shipment can also be reduced over time. Better control of shipment data, from end to end, also has the potential to improve compliance with regulations, reduce the number of inspections required at ports, and lower transit times. Inventory cycle times and stock inventory can also be lowered because the increased knowledge about the goods in transit allows for better planning throughout the entire process. Finally, improved customer service provides an opportunity to generate greater customer loyalty. Realigning security processes for freight has the potential to reduce reliance on random and incomplete inspections. At present, enforcement entities in the global transportation network are primarily concerned with spot-checks that verify compliance with bills of lading and other regulatory schemes at pre-designated control points. This approach is expensive because it disrupts the flow of finished goods headed to customers. Getting this process right is important because a disruption of the movement of containerized freight has immediate and wideranging economic implications for the global economy. When ports, rail yards, airports, and other key transportation nodes close, goods in transit can come to a standstill and global transportation assets can backlog. When the 29 ports on the west coast of the United States were closed to container traffic for 9 days in September and October 2002 due to a labor conflict, the backlog of ships forced to anchor and wait to enter the Ports of Los Angeles and Long Beach grew to greater than 150 ships. Manufacturing plants throughout the globe also become unable to get the parts they needed and many had to severely curtail or shut down production lines. Products such as food can be a total loss, if delayed, because of their time sensitivity for getting to the marketplace. A 40-foot container of lobster tails can be worth as much as $250,000. Whether it is for auto parts or cell phones, the global supply chain is a complex system that is highly sensitive to disruptions.
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Tracking and monitoring cargo throughout the entire end-to-end movement increases visibility while establishing and preserving a proven chain of custody. To meet this objective, you must first be able to guarantee the integrity of the loading, documentation, and sealing process. Second, you must be able to monitor the shipment in transit, detecting for tamper detection. Third, you should be able to provide complete, accurate, timely and protected information to those who need the information throughout the shipment, which may include internal departments, external customers, other supply chain partners, or government officials. An estimated 20 million freight containers are currently circulating the world, and roughly 7 million of them pass through U.S. ports every year. Ensuring the security and integrity of those containers and their contents is the ultimate goal of any cargo security plan. Over the last several decades, goods movement has increasingly shifted from break bulk to the use of containers. Containers have delivered on the promise of efficiency, but they have also proven themselves vulnerable to theft and misuse by criminals. In fact, just after 9/11 in October of 2001, a 43-year old Egyptian was found at an Italian port inside a modified container aboard a German ship. The mans container had a small kitchen, a bed, food, water and batteries, and a cell phone. Processes implemented to enhance transportation make good business sense if they are designed to improve shipment visibility, which can, in turn, deter terrorism, impede the smuggling of drugs and humans, cut down on cargo theft, reduce the number of lost or misrouted shipments, enable authorities to identify fraud, and improve export controls. Investment in state-of-the-art cargo security technology and monitoring solutions can provide significant return on investment and often at bargain prices considering the value of the capital that could be lost by a disruption in the global container shipping.
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Strong emphasis needs to be placed on business continuity planning starting with an evaluation of the firms suppliers, distribution channels, facilities selection criteria, and internal policies and procedures that support preparedness for disruptive events. This approach focuses on security in the broader strategic sense by integrating security and resiliency initiatives into the decision-making process on everything from vendor and third-party logistics selection to the location of outsourced production lines and call centers. A firms partners, customers and others have vital roles to play in the success of the firm and so should be involved in overall preparedness for disruptive events. A knowledge of risks leads to better decisions about risk mitigation versus risk acceptance, which, if properly measured, can create value for the firm through its use as a market differentiator that enables the firm to be rewarded by consumers and insurance and investment analysts. The reason this approach to security is so vital to businesses in todays world is that it is predicated on sound business and security practices that ensure preparedness for all manner of disruptive events, whatever the cause. It recognizes the challenges created by the forces of globalization and embraces them as opportunities for process improvements. It justifies investments in overall resiliency that ensure a firm is optimally positioned to reap the benefits of medium and long-term mission surety, in particular by both avoiding single points of failure in the global supply chain and by ensuring an ability to rapidly resume operations should a disruption take place. I have recently completed a book to be coming out in September entitled Securing Global Transportation Networks that expands on this concept of security as a core business function. (Figure 16)
Summary
Summarizing this report, U.S. Business Logistics costs were equal to 9.5 percent of nominal GDP in 2005. Transportation costs rose 15.2 percent in 2005, the
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single largest rise and now account for 6 percent of nominal GDP. Costs were up for virtually every component of business logistics costs. Interest rates have begun to climb back up and this combined with bigger inventories pushed inventory carrying costs to new highs also. (Figure 17) The economy is still growing and freight shipments are forecast to increase at double digit levels. We are hampered by inadequate and aging infrastructure and in need of strong national leadership to focus on solving the tough capacity problems facing out transportation network. Embracing security as a core business function will enable firms to gain measurable bottom line benefits while mitigating the need for a plethora of invasive government practices.
Rosalyn A. Wilson
About Rosalyn A. Wilson

Rosalyn Wilson is employed by Reality Based IT Services, Ltd. (RBIS, Ltd.), an information technology security firm and subsidiary of SYS Technologies. She is also an independent consultant with over 29 years of experience in the transportation field. She has extensive experience in research and writing; data collection and analysis; modeling and benchmarking; and management tasks such as policy formulation, business process redesign, infrastructure systems analysis, market analysis, and institutional strengthening. Much of her experience has been in the transportation and logistics industry. Her practice focuses on the analysis of the performance of various sectors of the industry and identifying and analyzing key issues facing the transportation industry. Rosalyn has worked on the State of Logistics Report , originally authored by late Bob Delaney, since 1994. In the early years of the report she contributed data and analysis to assist Bob in the preparation of the report and in 1999 she joined Bob as co-author of the report. In 2004, she assumed full responsibility for the report.
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Prior to establishing her consulting practice Rosalyn was a senior consultant with Booz Allen Hamilton's transportation group. She has continued her association with the group, in a sub consultant role, supporting their efforts in transport, trade and technology, both domestically and internationally. She was a director at the Eno Transportation Foundation, managing several of the Foundation's major programs and publications. While at the Foundation she helped establish and directed the activities of the Eno Center for Transportation Leadership Development and served as the Administrative Director for the Council of University Transportation Centers. Rosalyn has extensive railroad industry experience, having served in various capacities for over 11 years at the Association of American Railroads (AAR). She designed and maintained cost indexes reflecting changes in costs associated with railroad freight service as mandated by Congress when the industry was deregulated. Ms. Wilson developed the index methodology; collected data; calculated indexes; verified and audited railroad input data; and analyzed index fluctuations. She assisted railroads in the design or modification of data collection systems to comply with AAR instructions and to meet Interstate Commerce Commission regulations. Prior to the AAR she was a transportation analyst at the U.S. Department of Labor's Bureau of Labor Statistics. Rosalyn has written for and served as editor for many publications. She was the author of Transportation in America, a compendium of transportation information published annually by the Eno Transportation Foundation from 1993 through its most recent edition released in 2003. She also authored the Foundation's National Transportation Organizations and served as co-editor of the Transportation Quarterly. While at the AAR she compiled many of the association's data publications including the Analysis of Class I Railroads, the Railroad Fact Book, and the Railroad Ten-Year Trends.
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About CSCMP
Serving over 9,000 members worldwide, the Council of Supply Chain Management Professionals is the premier individual membership association for supply chain management professionals. Through our many publications, as well as education and networking opportunities, CSCMP provides its members what they need to become more effective supply chain managers.
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June 19, 2006
Presenter Rosalyn Wilson
The U.S. Business Logistics System Cost is the Equivalent of 9.5 Percent of Current GDP in 2005
$ Billions Carrying Costs - $ 1.763 Trillion All Business Inventory 58 Interest 245 Taxes, Obsolescence, Depreciation, Insurance 90 Warehousing Subtotal 393 Transportation Costs Motor Carriers: 394 Truck - Intercity Truck - Local 189 Subtotal 583 Other Carriers: Railroads Water Oil Pipelines Air Forwarders (International 29 Domestic 5) (International 15 Domestic 25) 48 34 9 40 22 Subtotal 153 Shipper Related Costs Logistics Administration TOTAL LOGISTICS COST 8 46 1,183
Logistics Cost As A Percent of GDP
10.4
10.2
10.2
10.1
9.9
10.3 9.5 8.7 8.6 8.8 9.5
19 97
19 98
20 01
20 02
19 95
19 96
19 99
20 00
20 03
20 04
20 05
Agenda
1. The cost of the U.S. business logistics system in 2005 2. DOT FHWA Study of SOL Methodology 3. State of the logistics system 4. Summary, questions and clarifications
Total Business Inventories Rose Dramatically in 2005

1,920,000 1,820,000 1,720,000 1,620,000 1,520,000 1,420,000 1,320,000 1,220,000 1,120,000
00 20 01 20 02 20 03 20 03 20 04 20 05 20 06 20
Millions of Dollars, end of period
Source: U.S. Department of Commerce, Census Bureau
Commercial Paper Rates Rise Steadily Throughout 2005 Pushing Up Carrying Costs
7 6 5
Percent
4 3 2 1 0
2000 2001 2002 2003 2004 2005
Source: Board of Governors of the Federal Reserve System
The U.S. Business Logistics System Cost is the Equivalent of 9.5 Percent of Current GDP in 2005
$ Billions Carrying Costs - $ 1.763 Trillion All Business Inventory 58 Interest 245 Taxes, Obsolescence, Depreciation, Insurance 90 Warehousing Subtotal 393 Transportation Costs Motor Carriers: 394 Truck - Intercity Truck - Local 189 Subtotal 583 Other Carriers: Railroads Water Oil Pipelines Air Forwarders (International 29 Domestic 5) (International 15 Domestic 25) 48 34 9 40 22 Subtotal 153 Shipper Related Costs Logistics Administration TOTAL LOGISTICS COST 8 46 1,183
Ozark Trucking Opens Drivers Center to Retain Drivers

Showers Laundry facility Computers with Wi-Fi Internet Lounge areas with televisions Fitness center where drivers can exercise after a long day on the road Provide services for at least 50 drivers a day Truck drivers can also refuel outside the center
Fuel Prices Still Climbing
2004 - $65.9B
2005 - $87.7B
2006 - $94.0B
Diesel prices were $2.89 a gallon last week, compared with $2.23 a year ago
Index of Logistics Costs as a Percent of GDP 1985 - 2005

110
90
1984 = 100
70
50
30
19 87 19 91 19 89 19 93 19 95 20 05 19 85 19 99 20 03 19 97 20 01
Y ear
Inventory
Transportation
Total
Ports Handling More Than One Million Containers

2004 2005
Los Angeles, CA Long Beach, CA New York, NY Charleston, SC Savannah, GA Oakland, CA Seattle, WA Norfolk, VA Houston, TX Tacoma, WA
4,874,730 3,764,257 3,163,197 1,421,251 1,290,178 1,197,331 1,049,105 1,206,034 1,097,769 940,638
4,864,032 4,378,446 3,387,305 1,508,564 1,469,237 1,373,769 1,339,469 1,318,762 1,221,541 1,154,834
10
Congestion Costs Truckers $72.65 per Truck-Hour

National Highway System Estimated Peak Period Congestion: 2020
Source: U.S. Department of Transportation, Federal Highway Administration, Office of Freight Management and Operations, Freight Analysis Framework.
11
Recommendations to Address Critical Infrastructure Needs 1. National leadership with vision 2. Focus on near-term projects that can provide great benefit ramp metering, extended hours, peak hour charging, technology 3. Draw up long-range plans to modernize and enhance our nations ports begin immediately on the processes to implement 4. Develop a plan with the railroads to encourage private investment in new capacity
12
Recommendations to Address Critical Infrastructure Needs 5. Enhance our inland waterway system, modernize and plan and build facilities to expand the range of products carried to include containers. 6. Plan and implement additional lane miles of roadway, particularly in urban areas, plan truck only lanes to cut down on congestion.
13
Are terrorism, political upheaval, natural disasters, accidents and other large-scale disruptive events happening more frequently, or are they just having a more significant impact than in previous years?
The answer is yes more disruptions are occurring and are having a more significant impact.
14
The high frequency of rare events while the likelihood for any one event that would have an impact on any one facility or supplier is small, the collective chance that some part of the supply chain will face some type of disruption is high. Yossi Sheffi
15
Available in September from McGraw-Hill
16
Summary 2005 Logistics Costs rose to $1,183 billion Logistics cost were equivalent to 9.5 percent Percent of GDP in 2005 Transportation costs rose 15.2 percent and now account for 6 percent of nominal GDP
17
The Cost of the Business Logistics System in Relation to Gross Domestic Product
$ Billion Except GDP
YEAR
NOMINAL GDP $ TRILLION
VALUES OF ALL INVENTORY BUSINESS CARRYING INVENTORY RATE
INVENTORY TRANSPOR- ADMINI- TOTAL U.S. LOGISTICS CARRYING TATION STRATIVE LOGISTICS % OF COSTS COSTS COSTS COST GDP
INVENTORY TRANSPOR- INV. AS A AS A % OF TATION AS % OF GDP GDP A % OF GDP 1985 BASE
TRAN AS A TOT. AS A GDP AS A TOT AS A % 0F GDP % OF GDP % OF GDP % 0F TRAN 1985 BASE 1985 BASE 1985 BASE 1985 BASE
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 * 2004 * 2005
3.93 4.22 4.46 4.74 5.10 5.48 5.80 6.00 6.34 6.66 7.07 7.40 7.82 8.30 8.75 9.27 9.82 10.13 10.49 11.00 11.73 12.49
826 847 843 875 944 1005 1041 1030 1043 1076 1127 1211 1240 1280 1317 1381 1478 1403 1451 1510 1647 1763
29.1% 26.8% 25.7% 25.7% 26.6% 28.1% 27.2% 24.9% 22.7% 22.2% 23.5% 24.9% 24.4% 24.5% 24.4% 24.1% 25.3% 22.8% 20.7% 20.1% 20.4% 22.3%
240 227 217 225 251 282 283 256 237 239 265 302 303 314 321 333 374 320 300 304 336 393
268 274 281 294 313 329 351 355 375 396 420 441 467 503 529 554 594 609 582 607 652 744
20 20 20 21 23 24 25 24 24 25 27 30 31 33 34 35 39 37 35 36 39 46
528 521 518 540 587 635 659 635 636 660 712 773 801 850 884 922 1007 966 917 947 1027 1183
13.4 12.3 11.6 11.4 11.5 11.6 11.4 10.6 10.0 9.9 10.1 10.4 10.2 10.2 10.1 9.9 10.3 9.5 8.7 8.6 8.8 9.5
6.1 5.4 4.9 4.7 4.9 5.1 4.9 4.3 3.7 3.6 3.7 4.1 3.9 3.8 3.7 3.6 3.8 3.2 2.9 2.8 2.9 3.1
6.8 6.5 6.3 6.2 6.1 6.0 6.1 5.9 5.9 5.9 5.9 6.0 6.0 6.1 6.0 6.0 6.0 6.0 5.5 5.5 5.6 6.0
100 100 90 88 91 96 91 79 69 67 70 76 72 70 68 67 71 59 53 51 53 59
100 100 97 96 95 92 93 91 91 92 91 92 92 93 93 92 93 93 85 85 86 92
100 100 94 92 93 94 92 86 81 80 82 85 83 83 82 81 83 77 71 70 71 77
100 100 106 112 121 130 137 142 150 158 168 175 185 197 207 220 233 240 249 261 278 296
100 100 103 107 114 120 128 130 137 145 153 161 170 184 193 202 217 222 212 222 238 272
* revised Data Sources: National Income and Products Accounts, Bureau of Economic Analysis; U.S. Statistical Abstract, U.S. Department of Commerce, Transportation number based on methodology developed for the Transportation in America series, Rosalyn Wilson, Eno Transportation Foundation, Washington, DC Methodology: Business Logistics: Heskett, Ivie, Glaskowsky. 2nd Edition, 1973 The Ronald Press, New York, NY

17th Annual State of Logistics Report

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17th Annual State of Logistics Report

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17th Annual

State of Logistics Report

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Embracing Security as a Core Business Function