Monday, September 14, 2009

Economy - What Strategy Should You Employ Today for Your Transportation Costs Tomorrow?

Mixed Signals on Economic Recovery??? Here's What We Found From a Couple of Trusted Sources:

Logistics Management

"In the last two weeks there have been an abundance of signs signifying positive economic activity. Some examples include:

· the Institute of Supply Management’s manufacturing index—the PMI—which covers the overall health of the manufacturing sector, rose four percentage points to 52.9 percent, marking the first time the index has climbed above 50 since the recession began—the 50 percent mark is typically viewed as the dividing line between “growth” and “contraction”;

· the Department of Commerce’s recent report that durable goods orders were up by its largest amount in two years, with a 4.9 percent bump, that has seen the increase up in three of the last four months;

· the Cass Information Systems Freight Index, which measures freight expenditures and payables, was up 1.3 percent in August compared to July."

While the overall economic picture is blurred, one industry analyst told LM there are some things to be optimistic about “In general, things are positive, especially the ISM index which suggests manufacturing is picking back up,” said Eric Starks, president of freight transportation forecasting firm FTR Associates. “We have been looking for stabilization in the economy and have seen things stabilize in the last three months as the economy has hit the bottom.”


Supply Chain Management Review

Trucking, which accounts for 78 percent of transport by revenue and half of all business logistics cost, was particularly hard hit, rising just 1.3 percent compared with 4.4 percent for the other modes (rail, barge, air cargo, oil pipelines and forwarders).

For shippers, this has resulted in bargain transport rates, especially in trucking and ocean transport, according to Rosalyn Wilson, the long-time author of the SoL report.

“Abundant capacity, particularly in trucking and ocean shipping, pushed rates down (last year), often below costs,” Wilson said. “Many companies have not survived the prolonged downturn. Many more will not survive the upcoming months as we continue to ride out the recession.”

As a result of the shakeout—more than 3,000 motor carriers ceased operations last year, taking out approximately 7 percent of truck capacity—supply chains are being redefined and processes changing, Wilson said.

“The industry will emerge more efficient and resilient,” Wilson predicted.

“It is becoming more apparent that we will see an end to the decline by the end of this year but not a quick recovery,” she said.

One indicator of that is the sharp, record rise in inventory-to-sales ratios, which Wilson called an “unwelcome sign” of a slow recovery. Even with historic inventory reduction rates, the inventory-to-sales ratio skyrocketed from a low last June of 1.25 to 1.46 by December. That is the swiftest rise in that benchmark since 1982. And Wilson said it occurred across the entire distribution chain—wholesale, manufacturing, and retail.

That took a toll on transport pricing. After 6 percent rise in 2007, total transport costs were up less than 2 percent last year. Trucking, the largest component of transport, rose just 1.3 percent. Lower fuel surcharges and tougher bargaining by shippers were cited, especially during the soft 2008 fourth quarter, when truck tonnage fell 6 percent. That decline has carried over into this year, Wilson said.



So What Strategy Should the Smart Transportation Manager Take?

Wilson is advising shippers and logisticians to be proactive in preparing for the recovery. She is recommending shippers lock in capacity now with guarantees before space becomes scarce.

“Re-evaluate your relationships with your supply chain partners and strengthen them,” Wilson advised. “Carriers have already begun expressing the sentiment that when capacity gets tight—and it will—they will remember customers who worked with them through the recession.”

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