Executive Briefings

When Is 'Up' a Bad Word? When It Refers to Gas Prices, Interest Rates, Inventories and Logistics Cost

Higher gasoline prices, interest rates and inventory levels all conspired to push up nationwide logistics costs to $1.3tr last year, a 63-percent rise over the course of the last decade. That's the unnerving conclusion of the 18th annual State of Logistics Report, sponsored by the Council of Supply Chain Management Professionals. In 2006, the report finds, U.S. business logistics costs accounted for 9.9 percent of gross domestic product, versus 9.4 percent in the prior year. All of this took place against the backdrop of a slowing U.S. economy, weighed down by poor performance in the housing and automotive sectors.

Transportation costs remained the largest component of overall logistics costs. Spurred by ever-rising fuel expense, they increased by 9.4 percent in 2006. But inventory carrying costs rose even faster, by 13.5 percent. The average investment in all inventories in agriculture, mining, construction, services, manufacturing, wholesale and retail trade was nearly $1.9tr, a $109bn rise over the previous year. So much for efforts by business to cut inventories with the help of just-in-time supply strategies. The "dampening" of a 15-year downward trend in inventory-to-sales ratios, caused in part by rising interest rates and higher amounts of inventory flowing through the system. While large retailers are keeping lean stocks on hand, they are foisting inventory back on their suppliers, requiring them to stock and re-supply stores more frequently. A rise in warehousing costs, as manufacturers and retailers look to warehouses to provide a wide range of value-added services, such as packaging, light assembly and radio frequency identification (RFID) tagging. Such are the factors that caused logistic costs to approach 10 percent of GDP, a level they haven't exceeded since 2000, when our economy was facing some of the same pressures it now faces: rapidly rising and volatile fuel prices and some signs of a looming recession.
http://www.supplychainbrain.com

Higher gasoline prices, interest rates and inventory levels all conspired to push up nationwide logistics costs to $1.3tr last year, a 63-percent rise over the course of the last decade. That's the unnerving conclusion of the 18th annual State of Logistics Report, sponsored by the Council of Supply Chain Management Professionals. In 2006, the report finds, U.S. business logistics costs accounted for 9.9 percent of gross domestic product, versus 9.4 percent in the prior year. All of this took place against the backdrop of a slowing U.S. economy, weighed down by poor performance in the housing and automotive sectors.

Transportation costs remained the largest component of overall logistics costs. Spurred by ever-rising fuel expense, they increased by 9.4 percent in 2006. But inventory carrying costs rose even faster, by 13.5 percent. The average investment in all inventories in agriculture, mining, construction, services, manufacturing, wholesale and retail trade was nearly $1.9tr, a $109bn rise over the previous year. So much for efforts by business to cut inventories with the help of just-in-time supply strategies. The "dampening" of a 15-year downward trend in inventory-to-sales ratios, caused in part by rising interest rates and higher amounts of inventory flowing through the system. While large retailers are keeping lean stocks on hand, they are foisting inventory back on their suppliers, requiring them to stock and re-supply stores more frequently. A rise in warehousing costs, as manufacturers and retailers look to warehouses to provide a wide range of value-added services, such as packaging, light assembly and radio frequency identification (RFID) tagging. Such are the factors that caused logistic costs to approach 10 percent of GDP, a level they haven't exceeded since 2000, when our economy was facing some of the same pressures it now faces: rapidly rising and volatile fuel prices and some signs of a looming recession.
http://www.supplychainbrain.com