DC Velocity - July 2013

newsworthy

nomic growth, they also underscore the gains made by the supply chain sector since the recession ended, according to Wilson. This will allow the ratio to remain at low levels even as business and shipping activity rises in future years, she said. The ratio “compares quite favorably to that of our trading partners,” she said in her report.

How one glimpses the future depends on how they look at their glass, Wilson said. Those expecting a near-term return to pre-2007 levels will be sorely disappointed, she said. Those who’ve reset their expectations to accept a consistent, though hardly stellar, economic growth rate will not be. “I’m pretty satisfied with where we are,” she said in response to a question.

Executives appearing with Wilson to comment on the findings voiced cautious optimism. Mark Althen, president of Penske Logistics, said he’s seeing a steady drumbeat of new shipper business and increasing activity from existing customers. Brent R. Beabout, senior vice president, supply chain for Office Depot, said that demand from large customers has been robust, but that smaller businesses have not really recovered from the downturn.

CAUGHT FLAT-FOOTED

A return to historical growth rates would cure many ills. It appeared the economy was on the cusp of such an event through late spring of 2012, but then the recovery stalled. A surprised supply chain got caught with excess inventory in the pipeline. This led to a 4-percent year-on-year rise in carrying costs in spite of very accommodative monetary policy. Inventories rose in every quarter but the second, according to the report. Inventory levels in the first quarter surpassed the levels of the third quarter of 2008, considered to be the worst quarter of the recession.

Retail, wholesale, and manufacturing inventories all rose in 2012, with retail inventories increasing by 8. 3 percent, more than double the increase of wholesale inventories and more than six times the rise in manufacturing inventories. For all their efforts to reduce inventory levels through better forecasting methods, retailers were still caught flat-footed by the rapid decline in demand after May, Wilson said. “Inventory is not moving, period,” she said in an interview several days before the report’s release. Retail stocks must be drawn down considerably for the economy to fully recover, Wilson said.

One knock-on effect is that warehousing costs increased by 7. 6 percent as rising inventories fully absorbed warehouse capacity, which had already been pared back during and immediately after the recession. By extension, leasing rates also rose, the report said. New construction took up some of the slack, but rising occupancy rates offset the capacity increases, the report said.

As for the individual transportation modes, trucking costs—essentially defined as rates paid by modal users— increased 2. 9 percent in 2012. Truck tonnage increased 2. 3 percent over 2011 levels. Truckers have been satisfied with their tonnage activity through the first half of 2013, Wilson said. However, they have been disappointed in their inability to raise prices to levels needed to neutralize a host of rising costs from labor to equipment and still make a decent return, she said.

The report predicted that the shortage of qualified drivers, now believed to stand at about

30,000, could swell to nearly four times that by 2016. That increase will be caused by the various government regulations that will take marginal drivers off the road. It will also reflect the industry’s struggles to hire and retain younger drivers to replace those who retire, quit, or die. Only about 17 percent of the current driver population is under 35, according to the report.

Rail transport costs paid by users rose 4. 9 percent, down from an increase of more than 16 percent in 2011. The large drop came despite the second best year on record for intermodal volume and a leveling off in a severe multiyear decline in coal traffic, which accounted for more than 40 percent of rail tonnage. Wilson said that rail equipment and infrastructure are in ample supply and in excellent shape, a result of the industry’s pouring a record $13 billion last year into capital spending, a 16.1-percent increase over 2011 levels.

Wilson blamed the sharp decline in the growth of rail shipping costs on fall-offs in tonnage for coal, grain, and chemicals, which accounted for 62 percent of total tonnage hauled. Intermodal came under severe rate pressure from truck competition, especially as railroads began expanding into shorter-haul lanes traditionally the province of motor carriers. Three commodities reporting tonnage gains— petroleum products; motor vehicles and equipment; and crushed stone, sand, and gravel—made up only 15 percent of rail tonnage last year, according to the report. Energy, which showed incredible growth last year, is still only about 2 percent of rail tonnage.

The ocean and international air sectors had a tough time of it last year, with slack global economies and a glut of capacity combining to curb demand and pricing. For example, ocean costs fell by 0.9 percent last year as vessel capacity rose 7. 2 percent. Capacity is expected to rise by 10 percent in 2013 as new vessel deliveries exceed demand to fill it, Wilson said.