Very Challenging State - By John D. Schulz


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	M O T O R

'Very Challenging' State

By John D. Schulz

Logistics cost top $1 trillion in 2000, inventory
managed more efficiency than last 'soft landing'

Though challenged by a faster and more severe economic downturn than that forecast by nearly every economist, the national logistics managers did an admirable job coping and reducing inventory last year, two leading experts said last week.

"It is clear that logistics managers have done a better job controlling inventory investment during our current economic slowdown than they did during the so- called soft landing of 1995-1996," said Robert V. Delaney, senior vice president, St. Louis-based Cases Information Systems and consultant, ProLogis.

In issuing his 12th annual "State of Logistics Report;' Delaney and consultant Rosalyn Wilson released an avalanche of data to support their claims. Back in 1995-96, monthly inventory ranged between 1.4 and 1.44 months of supply. In March 2000, inventory-to-sales hit a record low of 1.31 months of supply. That reached 1.32 months of supply in mid-2000. As the slowdown hit, that ratio reached 1.36 months of supply last December, which Delaney called "a solid performance' '

The pair labeled the current state of logistics "very challenging" for managers coping with reduced demand, a plethora of woes affecting the trucking industry (still the engine that drives the nation's freight machine), as well as other diverse factors such as growth of third-party logistics which threatens past provider- shipper relationships.

For the first time, annual logistics costs topped $1.006 trillion, or the equivalent of 10.1 percent of the gross domestic product. That compared with $921 biuion in 1999. Broken down as a percentage of GDP, last year's logistics costs were 3.8 percent of GDP for inventory costs and a record-low 5.9 percent of GDP for transportation, compared with 3.6 percent and 6 percent respectively in 1999.

By historical comparison, logistics costs were 16.1 percent 4if GDP in 1980, the last year that trucking was economically regulated. Inventory was 7.9 percent of GDP that year with transportation eating up 7.6 percent of GDP as well (see chart).

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Besides deregulation, Delaney credited logisticians (and third-parties) with performing the day-to-day grunt work of supply-chain management and inventory control with flying colors.

Their range of solutions reminded us that managing inventory investment efficiently is a day-in, day-out, ongoing, never-ending type of activity," Delaney said. 'It is people, process and technology. If you do not first get the people and the process right, investments in technology will not be a solution''

That was shown by some of the nation's biggest names in manufacturing - on the down side. Cisco Systems failed to adjust its inventory and was forced to take a $2.5 billion write-off on examine inventory. Nike Corp. took on some faulty supply-chain software and lost at least $100 million in sales. Hewlett-Packard CEO Carly Fiornia said she felt she was "navigating through a fog' at times. Others surely must have felt the same way.

"The past year has taught us that in industries such as retailing, manufacturing and transportation , physical factors overwhelm the virtual," Delaney said. "Web-enabled supply chains may be the future but in the near term a manuafcturer lives or dies on the quality of its goods and its relationships with suppliers and customers."

That logistics managers could cope with diminishing demand was illustrated by comparison of inventories during the height of the slowdown.. There was a swing from inventory accumulation of $55.7 billion in last year's fourth quarter to a $7.1 billion liquidation in this year's first quarter. That was major, Delaney said.

It was so major that it was the largest downward adjustment in inventory investment since the end of World War II; 'he said. 'That $63 billion swing in price-adjusted inventories may have subtracted 2.5 percentage points from overall economic growth.

Though air freight and rail carriers reported flat aggregate revenue, intercity and local trucking costs increased by $31 billion over 1999. Trucking costs hit $481 billion last year. That gives trucking an 81.5 percent revenue share of the freight transportation pie, according to preliminary figures compiled by Eno Transportation Foundation. Rail ($36 billion), air freight ($27 billion) and maritime ($26 billion) remained flat (see chart).

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Delaney was the first to forecast the boom in third-party logistics. In 1990, he correctly forecast that 3PLs would be a $50 billion industry by 2000. According to Richard Armstrong of Armstrong & Associates, contract logistics grew by 24 percent last year, to reach $56.4 billion in total logistics revenue. Delaney, sitting on his laurels, says he's stopped forecasting 3PL growth, content to let industry leader Armstrong bat leadoff in that category. '"It appears that customers are selecting 3PLs to manage that activity - not the dot-com freight exchanges," Delaney said, predicting further consolidation and contraction in the online sector was ongoing and inevitable.

* Reprinted with permission from Traffic World, June 11, 2001