Thrive—Don’t Just Survive—
in Today’s Challenging Economy

Given today’s economic challenges, it’s vital supply
chain practitioners develop new thresholds
of efficiency and productivity. In 2007,
total U.S. logistics costs grew to nearly
$1.4 trillion, representing 10.1 percent of
the U.S. gross domestic product (GDP).
These costs increased last
year by $91 billion.

Rick Blasgen

As supply chain management (SCM) practitioners, it’s hard not to be concerned about the state of the U.S. economy. Every day there seems to be more bad news churning out of the media machine that could negatively impact our companies and our careers—or severely undermine even the best-laid business plans.

Although there are considerable challenges facing us, we, as supply chain leaders, have a solid track record of innovation and creativity when times get tough. If we stay the course and remain committed to our cause, we can—and will—overcome the current marketplace difficulties, and possibly achieve entirely new thresholds of efficiency and productivity.

First, it is critical to get the statistics and industry insight you need to help your organization survive—and even thrive. Companies and practitioners rely on the Council of Supply Chain Management Professionals’ annual State of Logistics Report®. Titled Surviving the Slump, this year’s report details the impact of rising energy and carrying costs on the U.S. economy. It also tracks and measures all costs associated with moving goods through the U.S. supply chain.

In 2007, total U.S. logistics costs grew to nearly $1.4 trillion, representing 10.1 percent of the U.S. gross domestic product (GDP). These costs increased last year by $91 billion. Although not always visible to the consumer, supply chain costs are a major (and growing) segment of the economy. That $1.4 trillion equals annual government spending on national defense, health and Social Security combined. Put in human terms, the logistics cost of moving goods comes to $4,656 for every man, woman and child in the United States.

Historically, logistics costs as a percentage of GDP have been dropping for decades. They bottomed out in 2003 at 8.6 percent of the GDP. Since then, rising transportation, inventory and interest costs have pushed them up each year. In 2007, intermodal freight, international containers and truck freight volumes were down. Truckers in particular had a tough time. More than 2,000 trucking companies with fleets of five or more trucks went bankrupt last year. unfortunately this trend appears to be accelerating. In the first quarter of 2008, 935 trucking firms filed for bankruptcy.

Another significant trend that we’re seeing is increasing inventories after many years of tightening. This is happening because supply chain practitioners are modifying their distribution processes to make sure they have adequate supplies on hand for just-in-time deliveries. For the first time ever, wholesale inventories are larger than retail inventories, as retailers and manufacturers are putting more pressure on wholesalers and distributors to hold inventory so they can deliver it just in time.

In conjunction with the recent release of our 19th annual State of Logistics Report in Washington, DC, CSCMP hosted a discussion panel comprising leading executives from top U.S. companies, who analyzed what the report’s findings mean for supply chain practitioners. The major themes that emerged from these discussions were fuel prices, infrastructure and inventories. The primary message was that both manufacturers and retailers are considering the impacts on these three key areas and beginning to rethink their supply chain approach.

Skyrocketing fuel prices that do not recede will likely force paradigm changes as sophisticated organizations manage total delivered costs across their extended supply chains. Chasing cheap labor may have resulted in manufacturing moves across continents—which will likely continue to occur—but will be overshadowed by transport costs that may have been unanticipated when the sourcing changes were made.

Panelist Jim O’Neal, president of O&S Trucking, Inc., observed that, while fuel is currently one of the main concerns of carriers, the quality and quantity of drivers going forward will continue to be an obstacle to successful truckload companies. “There will be even more pressure finding and keeping drivers as freight volumes pick up.”

“Another significant round of trucking failures is imminent,” O’Neal continued. “Capacity will tighten and remain tight—perhaps critically so, depending on the demand side. Since the truckload market is still very fragmented, market consolidation will continue. Larger companies can more readily compete by using economies of scale, purchasing power, network density and lower cost of capital. However, the longer the current ‘freight recession,’ the larger the rebound will be. Somebody has to physically haul the freight. The future is bright for those who survive.”

Saddle Creek Corporation president and panelist Cliff Otto stated that his company is adding more (demand-driven) warehouse capacity this year than in any other year in its history. “In the shorter term,” he said, “permanently higher energy prices are expected to have a number of significant impacts on supply chains. Domestically, many expect that the number of distribution points used in networks will expand.

“At the same time, we could see some shift from truck to other modes, primarily intermodal and/or boxcar. On the international front over a longer time frame, this fundamental change in energy prices could well slow the migration of manufacturing and assembly to Asia. We could see some of that business activity return to the Western hemisphere, particularly Mexico, Central America and parts of South America.”

Despite the pall of economic hard times, this could be the perfect time to consider investing in labor-displacing automation, possibly including “lights out” processes, re-lamping and other energy efficiency programs, stressed panelist Kevin F. Smith, senior vice president and corporate sustainability officer for CVS/pharmacy.

“I believe that companies that take advantage of this current downturn will not only survive the slump,” Smith continued, “but will emerge as breakaway leaders as the cycle winds to an end. Those companies that opt to hunker down and ‘wait for the economy to improve’ before choosing a course of action will be playing a dangerous game of catch-up, and they may never catch up to their competitors who use this time to learn and prepare.”

Mark Richards, panel moderator and vice president of Associated warehouses, Inc., emphasized the importance of being thoughtful in today’s difficult marketplace, not reactive. “We need to fully utilize all of our resources, including our professional networks, like we have through CSCMP, in order to thrive. If we embrace the current challenges and work to find solutions to them, it will make us all better practitioners.”

For our companies to survive, and even flourish, in these challenging times, we need to utilize technology to help us plan better. Transparency is key. We must quickly make adjustments in our distribution processes when necessary. We need to share information better with our partners and to work more collaboratively with them.
Most of all, we must focus on the business at hand and be optimistic. The trials we face today will produce the supply chain breakthroughs of tomorrow.