Carriers Face Growth Problems After Logistics Budget Cuts

This story appears in the June 14 print edition of Transport Topics.

WASHINGTON — Carriers will have difficulty expanding capacity cut last year after manufacturers and retailers slashed spending for transportation services, the Council of Supply Chain Management Professionals said last week.

Business logistics costs fell 18.2% to $1.1 trillion in 2009 from $1.34 trillion in 2008, as shippers responded to plummeting demand by cutting back on product inventories and paying less for transportation services, according to a CSCMP report released here June 9.

The cutback forced truck, rail, air and ocean freight carriers to downsize their fleets, and now, as the economy recovers, some companies are having difficulty replacing freight-hauling capacity lost during the recession, said the report’s author, Rosalyn Wilson, at a press conference held in conjunction with the release.

“The tenuous business climate and tightened credit controls will make it difficult to rapidly expand capacity for the remainder of 2010,” Wilson said. “It is likely that we will have capacity problems in some areas by year’s end.”

Wilson said spending on trucking services declined 20.3% in 2009 and carriers are reluctant to add capacity even as freight volumes have picked up.

“Truckload industry capacity is still dropping at unprecedented rates,” Wilson said in her report. “Many trucking companies used the economic downturn to evaluate their business model and most chose to reduce their fleet size to operate more leanly.”

Driver shortages also will affect truck capacity.

“Truck drivers are being hired at a very slow rate,” Wilson said. “Carriers are still setting high standards and trying to hire experienced drivers.”

New federal safety enforcement procedures this year also will have an effect on driver availability, and, according to Wilson, “The lack of drivers will slow the return of trucks to the marketplace.”

Adding to the uncertainty for transportation service providers is the fact that many shippers are unable to give carriers long-term forecasts of demand.

“Customers are being very cautious,” said Vince Hartnett, president of Penske Logistics, who participated in a panel discussion following the presentation of the logistics report. “Companies are not going to bring more capacity until we see the consumer drive manufacturers and retailers to put more products on the shelf.”

John Lanigan, executive vice president and chief marketing officer for BNSF Railway, said during the panel discussion that his company has begun to rehire personnel laid off during the recession in anticipation of increased demand — but that adding capacity will take time.

“We are able to handle an increase in demand,” Lanigan said, “but we can’t do it tomorrow.”

Peter Sturtevant, vice president of supply chain solutions for U.S.-based medical equipment supplier Covidien, said capacity constraints already are affecting rates on some air and ocean freight lanes.

“For example,” he said, “we paid $400 to bring [a full container load] of gauze from China last year. Now it is $2,500 a box.”

Wilson said her advice to shippers was for them to be “first at the table” to negotiate rates and capacity with freight carriers.

“Guarantee a minimum level of business in return for guaranteed carriage or limited rate hikes two or three years out,” she said. “Consider offering assistance — perhaps in the form of new terms — to weaker links in your supply chain to ensure their survival.”

Logistics costs have dropped by almost $300 billion over the past two years and fell to 7.7% of gross domestic product in 2009, the lowest level since the group began gathering the data in 1981, Wilson said.

The ratio of logistics costs to GDP, which is thought to be a good way to assess the relative efficiency of distribution pro-cesses in the United States, has declined steadily since 1981, when the first report estimated logistics costs to be $506 billion, or 16.2% of GDP.

Transportation accounts for roughly two-thirds of total logistics costs. The remaining costs are related to the acquisition and storage of inventory, plus a small amount for logistics administration.

According to the report, inventory carrying costs, including interest, taxes and depreciation, insurance and warehousing, fell by 14% to $357 billion in 2009 from $415 billion in 2008.

Wilson said she expected inventories to remain at relatively low levels, although freight shipments will probably pick up as sales improve.

“There has not been any substantial restocking of inventory,” she said.

Wilson also said she expects the Federal Reserve to raise interest rates later this year.

She also said that, unlike conditions in the 2001 recession, in 2009 many companies did not adjust inventories quickly in response to the economic downturn — partly because many goods are ordered months in advance and come from distant locations.