Logistics costs hit all-time high in 2005

Logistics costs hit all-time high in 2005    Logistics costs for U.S. businesses soared 15.2 percent in 2005 to a record $1.2 trillion, equivalent to 9.5 percent of domestic economic output, sharply reversing a 20-year trend of lower logistics costs that has helped make U.S. businesses more competitive worldwide, according to a new study.
   Early signs indicate that logistics costs will increase to more than 10 percent of gross domestic product in 2006 due to the continuation of higher fuel prices, government-mandated security investments, rail and truck capacity shortages and the tight labor market for truck drivers.
   Rising freight transportation costs and interest rates were the primary reasons that logistics costs increased $156 billion, almost double the $71 billion jump in logistics costs recorded in 2004 and the largest year-to-year change recorded by transportation consultant Rosalyn Wilson and her predecessor Robert Delaney since they began compiling the annual “State of Logistics” report 17 years ago. Freight transportation costs were up 14.1 percent in 2005.
   Real logistics costs may be rising at a greater rate, but Wilson’s approach compares the rise in logistics costs to the growth of the economy. In 2004, logistics costs were 8.8 percent of gross domestic product due to a combination of productivity gains and low interest rates.
   Logistics costs as a percentage of the economy hovered between 10 percent and 11 percent throughout the 1990s and were last above 10 percent in 2000 (10.3 percent). Logistics costs as a percentage of economic growth have increased by more than 25 percent in the last two years. The only reason preventing logistics costs from topping the 10 percent mark in 2005 was that they were offset in part by the robust 6 percent growth of the economy, Wilson said at news conference.
   The economy is expected to slow in 2006 as the Federal Reserve continues to ratchet up interest rates to curb inflation.
   “Higher transportation costs and higher inventory carrying costs will combine with moderating growth in the overall economy to produce double digit logistics costs as a percent of GDP figures in 2006,” the study said.
   Transportation costs in 2005 rose 14.1 percent over 2004 levels. Inventory carrying costs were up 17 percent, the biggest increase in the study’s history, due to much higher interest rates and a rise in inventories as companies tried to buffer against the uncertainty of freight delivery. Average inventory investment in 2005 rose to $1.76 trillion compared to $1.63 trillion in 2004, according to U.S. Department of Commerce figures.
   Wilson predicted that companies will reduce their inventory levels in 2006 because of the high interest rates and their ability to fine tune their supply networks to quickly redirect goods where they are most needed through the increased use of smaller, regional distribution centers.
   All modes of transportation were able to raise rates in 2005. Overall, transportation costs accounted for $744 billion of the $1.2 trillion in logistics costs. Freight transportation was 6 percent of GDP in 2005, up from 5.6 percent. Trucking costs increased by $74 billion to $583 billion. Rail transportation costs jumped 14.3 percent to $48 billion. Air freight increased 17.6 percent or $6 billion during 2005.