Strategic trends impacting logistics in the US

Strategic Trends Impacting
Logistics in the United States
Logistics Seminar 2009
The Finnish Association of Purchasing and Logistics (LOGY)
Establish United Logistics Group
February 5, 2009; Helsinki, Finland
--------------

Richard Murphy Jr.
President & CEO
Murphy Companies
&
Immediate Past Chair
Council of Supply Chain Management Professionals (CSCMP)

NOTE: Steady Rise Since 2003!
10.5%
15%ase
re
10.0%
Inc
9.5%
Perspective…. 9.0%
U.S. Logistics System Cost 8.5%
8.0%
2003-2006: Truck Driver Shortage 7.5%
Impacts
2000
2001
2002
2003
2004
2005
2006
2007

2006-2008: Fuel Price Increase and
Rail Capacity Impacts

Logistics Cost as % of GDP
10.1% of GDP
Source: CSCMP State of Logistics 2008
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

U.S. Logistics System Cost (in €)
€ Billions
Carrying Costs
Interest 78
Taxes, Obsolescence,
7.95% of Total
& Deprec., Insurance 206
U.S Logistics Costs.
Warehousing 84
Up 9.9% from 2006.
368
Transportation
Motor Carriers
Truck - Intercity 344
48% of Total
Truck - Local 163
U.S Logistics Costs.
507
Other Carriers Up 5.9% from 2006.
Railroads 44
Water 29
Oil Pipeline 7
Air 31
Forwarders 23
134
(CSCMP 2008)
Shipper Related Costs 6
Logistics Administration 18
24

10.1% of GDP.
Total Logistics Cost 1033
Up 7% from 2006.

1

U.S. Logistics System Cost ….
• € 1,033,000,000 ($1,367,000,000) (CSCMP)

Equates to € 3,443.00 per person in the U.S.
($4,557.00)

U.S. Logistics System Cost (in €)
€ Billions € per U.S. Person
Carrying Costs
Interest 78 $ 260
Taxes, Obsolescence,
& Deprec., Insurance 206 $ 687
Warehousing 84 $ 280
368 $ 1,227
Transportation
Motor Carriers
Truck - Intercity 344 $ 1,147
Truck - Local 163 $ 543
507 $ 1,690
Other Carriers
Railroads 44 $ 147
Water 29 $ 97
Oil Pipeline 7 $ 23
Air 31 $ 103
Forwarders 23 $ 77
134 $ 447
Shipper Related Costs 6 $ 20
(CSCMP 2008)
Logistics Administration 18 $ 60
24 $ 80

Total Logistics Cost 1033 $ 3,443

Perspective….U.S. Trucking
• 2.9M Class 8 Tractors in U.S.
• 5.3M Trailers in U.S.

(ATA, most current data is 2006 survey)

2

Perspective….U.S. Warehousing
• 465 Million Square Meters (5 Billion Sq. Ft) (ProLogis)

Perspective….Warehousing
• 465 Million Sq. Meters of warehousing in U.S.
 Creates a 1.25 by 1.25 Meters Square (4.1 feet by 4.1
feet) of space in a warehouse for every man,
women and child in the U.S…..all 300,000,000 of
us…!!!
1.25 Meters

1.25 Meters

Perspective….Warehousing
• 465 Million Sq. Meters of warehousing in U.S.
Floor area equals a 1.22 Meter (4 foot) wide
sidewalk from here to the Moon…!!!

3

U.S. Economy…..
….During Current Recession

All transportation modes
dropping capacity FAST…!!!

Trucking Industry…..
Cumulative decrease in loads from
June 2008 to December 2008

….Capacity Reductions….
Carrier bankruptcies growing

Source: Wall Street Journal 12/11/2008

4

Equipment Sell-off - Trucking companies sell-off
of tractor equipment overseas growing

Lane Selection - Trucking companies have become very
selective in what lanes they will accept freight to reduce
“deadhead” miles driven and keep equipment moving.

Truck driver shortage - still a major factor;
current recession merely a lull in the storm

Driver Turnover

5

….Capacity
Reductions….
Truck driver shortage – Today’s
drivers older then average worker
and retiring fast…!!! New drivers
must be age 25 by insurance reg’s.

Rail industry has
same issue of engine
driver retirements &
shortage

Rail Industry….
….Trucking is not Alone….

Container &
Rail Car Traffic
Down….
BNSF Railroad ….But Investment
in Infrastructure
Up…

UP Railroad

Outsourced Warehouse / 3PL
Industry….
• Represents 25% of total warehouse space in U.S.
• Represents 25-33% of total warehouse cost in U.S.
• Grew 8-12% / year consistently for past 10 years.
• Expect 6-8% / year growth over next three years.

• The industry is not significantly feeling the
effects of the current slow economy…!!!

• $37.5 Billion - gross revenue of 3PL’s / Logistics Co’s warehouse / distribution only sector.
(Armstrong 2008)

• 8000 for-hire public / contract warehouse buildings in US. (Armstrong 2008)
• 900 for-hire public / contract warehouse companies. (Armstrong 2008)

6

Trends Influencing U.S. Logistics

More Warehouses (vs. Fewer)…???
• Last 10-15 yrs trend has been fewer and bigger warehouses. 3-5 Total.
• TQM, ERP, JIT / Lean Manufacturing & lower fuel cost driven!

Existing


• Growing impact of “big-box” retailers
• Less backroom stock space.
• Pushing inventory up-stream to suppliers.
• Reducing the cash flow tie-up a key factor.
• Demanding frequent replenishment and
smaller orders.


Source:
US Dept of
Commerce,
Bureau of
Economic
Analysis &
Source: U.S. Department of Commerce, Census Bureau CSCMP State
of Logistics
2007.

4

7


What’s Happened to the Order Profile…???

“Old 80:20 Rule”


North America “Mega-Regions”
– Network analysis further impacted by these growing regions

Rotman School of Management,
University of Toronto


Continued Impact of Eastern U.S…..

Source: The Tioga Group

8

Highway System....
….Congestion
Impacts

2020

2035

Source: U.S. Department of Transportation, Federal
Highway Administration, Office of Freight
Management and Operations, Freight Analysis
Framework.


Rail Rebirth….
….Key Realities
• More Energy Efficient
• Lower Emissions
• Lower Cost
• Longer Timelines
• At Max Capacity
• Intermodal Growth High
• Doesn’t Provide Local P&D


COFC- “Container-on-
Flat-Car”

Intermodal
• Growing to offset rising diesel
TOFC- “Trailer-on-Flat-Car”
prices and congested or “Piggy-back”
seaports.

• “Intermodal is a core
growth opportunity for
the railroads…but they
must adapt to the
expectations of typical
truckload customers”
Steve Weiby, VP, CH
Robinson.

9


• Intermodal
• Running into “NIMBY”
• Community opposition and “not-in-my back-yard”
• Pushing transload yards out from city.
Chicago: 56 miles out
Dallas/Fort Worth: 42 miles out


Rail Box Car Influences
• 1 Box-car handles 3-4 truck loads!
• Since the 1970s most new warehouses have not been
built with rail siding!
 Select Public/Contract/3PL Warehouse Companies are now
one of the few places to get rail access.


Rail Transload Centers
• Major Railroads establishing “Rail Transload
Partners” across the country with:
 Indoor warehouse unloading / loading
• Food and Paper Industry
 Outdoor rail yards for unloading / loading
• Lumber / Forest Products Industry

• Murphy is a Rail Transload Partner and handles
over 10,000 rail cars / yr.
• Rails Served w Facilities: BNSF, CN, CP, UP & MN
Commercial

Murphy’s Northtown
Logistics Campus

10

Trends Influencing….
U.S. Logistics
Revenue ton-miles
(billions)

440.0

420.0
Billions of Tons

Rail Influences
400.0

380.0

360.0
• Growing Volume
340.0

• Rail congestion impact
320.0

300.0

– Slower Trains
1999 Q3

1999 Q4

2000 Q1

2000 Q2

2000 Q3

2000 Q4

2001 Q1

2001 Q2

2001 Q3

2001 Q4

2002 Q1

2002 Q2

2002 Q3

2002 Q4

2003 Q1

2003 Q2

2003 Q3

2003 Q4

2004 Q1

2004 Q2

2004 Q3

2004 Q4

2005 Q1

2005 Q2

2005 Q3

2005 Q4

Railroad Average line-haul speed (mph)
26.0
25.0
24.0
mph

23.0
22.0
21.0
Source: Bureau of
Transportation Statistics 20.0
1999 Q3
1999 Q4
2000 Q1
2000 Q2
2000 Q3
2000 Q4
2001 Q1
2001 Q2
2001 Q3
2001 Q4
2002 Q1
2002 Q2
2002 Q3
2002 Q4
2003 Q1
2003 Q2
2003 Q3
2003 Q4
2004 Q1
2004 Q2
2004 Q3
2004 Q4
2005 Q1
2005 Q2
2005 Q3
2005 Q4

U.S. Logistics

Rail Congestion


Urban Land Prices - Pushing Out Logistics Centers
 These are the sites typically found in the suburban industrial parks.
 Minneapolis Costs:
1994: $1.00 - 1.25 / sq.ft.
2007: $4.50 – 6.00 / sq.ft.

…..500+ % increase in 10 years!

Impact –
Pushing Logistics centers
out further, thus increasing
transportation costs and
congestion.

Trend especially evident in
Chicago, New Jersey,
California, Dallas.

11

Where To Find
Warehouses
Today…???
 Growth of Large
Logistics Parks &
Corridors
 Regional Economic
Development Drivers.

 Big DC Campuses can’t be
close to big cities, but they
also can’t be too far out…!!!


Construction Costs….”SOARING…!!!”
• Example: Construction costs in Minneapolis Market for new warehouses

…. 73+% Increase since 2000 (8 Years)..!!!
 Cost per square foot ( at 200,000 sq. ft. & larger):
$22 - $24 (2000)
$38 - $45 (2008)

• Current recession has lowered construction costs only slightly.

This pricing is not unique to Minneapolis.
Typical of entire U.S.


Fuel Prices….

Diesel Prices: 1994-2008
$5.00
$4.50
Price Per G allion

$4.00
$3.50
($/Gallon)
$3.00
$2.50
$2.00
$1.50
$1.00
Jun-94

Jun-95

Jun-96

Jun-97

Jun-98

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Source: Department of Energy

12


“No trucking capacity has been added
after the perfect storm of 2000.
The risk vs. return & return on invested capital is very poor….
….no more juice to squeeze out of the fruit.”
WERC Conf 4/23/07

“The 2004/2005 capacity problem will pale in comparison
to the upcoming capacity crunch after the economy recovers!
National Press Club, 6/18/2008

Jim O’Neal
President
O&S Trucking

Why are Jim’s statements important…???

U.S. Commercial Freight Activity By %
Sources: Cureau of Transportation Statistics

Freight Transportation & U.S. Freight Transportation Forecast to…2016

80% 1993

Modal Shares 70% 1997
60% 2002

In Domestic Tonnage 50% 2004
40% 2016
30%
20%
10%
0%
Truck Rail Pipeline Water Multimodal Air

80% 70%
Trucking Capacity Issue Will Plague
69%
70%
the Economy for Years!
60%
2005
50%
2017
40%
30%
20% 15% 15% 10%
9%
7% 7%
10% 2%
1% 0% 0%
0%
Truck Rail Pipeline Water Rail Air
Intermodal
Source: U.S. Freight Transportation Forecast to…2017


13


Network Cost + Carbon Footprint Reduction….

Source: MIT 10-2008


Network Cost + Carbon Footprint Reduction….

Source of last 3
slides: MIT


Consolidation….
….Old Concept – Renewed Interest

• Growing interest by “individual”
shippers to:
• Consolidate multiple orders to a region.
• Wait till enough product ordered to ship
full loads.
• Utilize cross-dock operations to deliver
locally.
• Growing interest by “groups” of
shippers:
• Consolidate orders together to build full
loads for direct TL shipment or to a
cross-dock facility.

14


More Warehouses (vs. Fewer)..???

• Additional forces at work….
 Fuel price impacts – order size, frequency of
replenishment, etc.
 Growth of Lean Manufacturing and JIT plant
support.
Consumer trend toward “we
want it now!.”
SKU Proliferation…


• Trade-off of….
Higher inventory costs, lower carbon
footprint, more warehouse locations, etc.
vs.
Rising transportation costs,
capacity constraints, security, etc.

The economics are shifting…!!!


Serious consideration being given to increasing number of warehouse points.
 Where 3-5 network of warehouses was cost effective….. today many are
looking at becoming a 6-10 network of warehouses.

Existing

New DC

New Cross-
Dock

15

Global Supply Chains….Impacts on U.S.

U.S. Import Network

Source: The Tioga Group


Implications of offshore sourcing
/ manufacturing:
• Less manufacturing space needed in USA
• More DC / warehouse space
needed in USA
 Distance adds time and more
safety stock requirements

Resulting in changing
distribution patterns in US.


Historic Domestic Oriented Networks….
….vs. New Import Oriented Networks
 Internal source of product flows evolved over past 20 years to today’s
import focused product flows.
 Large shippers like Wal-Mart are also beginning to affect warehouse locations in order to
feed their huge complexes.

16


Import Transportation
• Asia to USA (7000 miles by ocean):
$1800.00 - $0.26 / Mile
• LA Port to Chicago (1750 miles by
intermodal): $2000.00 - $1.14 / Mile

Panama Canal
• Land cost portion is pushing many to
consider ocean voyages through the
Panama Canal for better access to east
coast and gulf ports.
• In 2008 – 25% of U.S. imports flowed
through the Panama Canal.

• 2014 - Panama Canal should be wide
enough for largest ships.

Global Supply Chains….
….Impacts on U.S.
• Growing congestion and new clean air
mandates for LA Ports are forcing many
to look at alternative ports and inland
routes: Prince
Rupert in Canada
& Mexican Ports


“Northwest
Passage”….
• People are starting to talk about
the feasibility in 10 years of the
“Northwest Passage” being
open for container ships.

• Caused by warm arctic waters
melting the ice.
• Will create a potentially
shorter route to east coast
and St. Laurence Seaway
ports.

17

“Northwest
Passage”….

…. + “Northeast
Passage”
for Europe?

Source: The Economist, Jan. 3, 2009 Issue,
p7 of Special Report on the Sea.


Port Congestion and High Fuel Price Impacts….
….Creation of Inland Ports
Rail / truck / ocean….
….integration hubs
Examples include:
• Chicago
• Cincinnati
• DFW / Texas
• Kansas City

• Memphis



• Atlanta




Port Congestion and High Fuel Price Impacts….
– ….Creation of Import Warehouses
Locations: Up to 100 miles from
ocean ports with services generally
provided by 3PL’s.
• Resulting from:
• land shortages near seaports
• Transportation efficiencies delivered by
maturing intermodal and rail industries.
• Activities include transloading,
repack and labeling.
• Example: 6 - 40’ containers = 4
- 53’ trailers

18


Import Containers….“Maersk Effect”
• No longer want their containers inland.
• Pricing reflects penalty for not transloading near port
1st ocean carrier to implement these rules.
•
• Others analyzing due to box and handling costs – will lead to growth in
transload service industry.


“Short-Sea” Shipping - To handle increasing port and highway
congestion “Short-Sea” Shipping is growing along the east coast and gulf -
practice is common in other parts of the world.

Port of Hong Kong Example – Note local
barge and unloading of regional ship for
further distribution.


“Short-Sea” Shipping….

19


73% experienced Logistics disruptions past 5 years
 94% of these reported impacts affected profitability & customer expectations.
(Accenture)

Control Tower Visibility….the need is growing…!!!
 Global supply chains are long & complex!
 Change from “Push” to “Demand” driven models.
“Time intolerance” growing in supply chain strategies and
consumer expectations.


Imports….
Impacts of
Fuel Cost

Can long supply chains still be cost effective?

Source: WSJ, 6-13-2008, page A1


”Near Sourcing”….
• Factors influencing re-evaluation
of offshore manufacturing:
 Energy costs – esp. in logistics /
transportation
 Complexity of supply chains and
visibility issue
 Long lead times
 Excess inventory required
 Larger carbon footprints – “Green”
movement impact
 Product Quality Controls
 Available labor pools in select
countries
 Impact in China from growing
internal consumer market (vs.
export market)

20


Focus changing from labor cost per hour to….
….greater focus on total landed cost….


Network evaluation becoming more important….

Source: MIT 10-2008


Network evaluation – Case Studies….

21


Network evaluation – Case Study….

Source: MIT 10-2008


“Made in America…..Once Again”
• DC Velocity Viewpoints web letter February 28 2008
Mitch MacDonald, Group Editorial Director.
• Corporations are abandoning their myopic focus on
hourly wages.
• Looking to USA again because it offers:
 Skilled labor force
 Automated manufacturing technology
 Strong transportation infrastructure
 Proximity to world’s largest market
 Political stability

Green Trends Influencing U.S. Logistics

“Eco”
• ….Eco-nomics
• ….Eco-logy

Many investors see “green” practices as a
reflection of good management practices.
Wall Street Impact on Green

22


Major corporations - “Green” Initiatives

• Warehouse / DC Performance Measure:
….100% Order Accuracy

Traditional Focus: ….Customer satisfaction.
Green Focus: …to avoid redelivery and thus
reduce carbon emissions.


Major corporations - “Green” Initiatives
• Warehouse / DC Performance Measure:
….Zero Customer Order Complaints

• Traditional Focus: …do whatever it takes to
make customer happy!...order minimums are no
problem…delivery ASAP!

• Green Focus: …increasing order minimums
to reduce delivery frequency, and longer order
lead times to facilitate transportation
consolidation.


Energy Creation Measures

• Wind power units – rooftop units (individual fans or
horizontal row of blades at roof edge to capture air flow rising up
and over building, & stand alone tower units.

23

Whole Foods Store, CA
Green Trends Influencing….
….U.S. Logistics

Solar Power Stations
Large available flat areas - “just sit there” - Solar panels not a great load factor
• Commercial solutions include:
 “Solar Energy Service Provider” who provides 100% responsibility to
design, build, own and operate the asset - including all upfront purchase and
installation costs.
 …..to solutions where building owner owns the solar assets.

Staples Store

2 Solar
Providers:

….U.S. Logistics

Need to keep in mind the
inland waterways as a
transportation option.


Economic Comparison….

24


▪ Implications….
• CEO / CFO’s - discovered the power of Supply Chain
Management.
• Wall Street
• Watching industry dynamics
• Logistics industry represents 10.1% of the economy, and growing
due to fuel prices.
• Supply Chain Managers – still searching for balance of
efficiency & customer service.
• Visibility – growing need as Supply Chains have become more
complex and long. Transportation / Logistics providers will have to meet
requirements.
• Mode Integration Growing – more and more interface
between ocean / rail / truck / river modes.


• Fuel Prices
• Will remain higher than tradition.
• Forcing changes to Supply Chain Networks – domestically and
globally.
• Supply Chain Network Design
• Growing interest in more DC and Crossdock locations.
• Likely to see 6-10 DC/Warehouse networks (vs. 3-5 which was
common since the late 1980’s).
• Trucks Will Remain a Major Player
• Trucks are expected to continue to handle 60-70% of all freight.
• Most freight involving rail / ocean / river is handled by trucks at
beginning & end of movements.
• Railroads are making a comeback – and will play a
greater role in the future.


• Global Supply Chains
• More cargo will arrive at gulf & east coast ports
• Growth of “Inland Ports” and “Import Warehouses”
• These two trends are creating large Logistics Centers in key
inland markets.
• “Made in America” is receiving serious consideration again.

• Green Logistics is in…!!!
• “Green” seen as a reflection of good management.
• Could lead to less service & options for shippers.
• Will likely lead to a “slow-down of logistics velocity.”
• “Consolidation / Pool Distribution” will likely come back in popularity
amongst shippers.

25

Strategic Trends Impacting
Logistics in the United States
Logistics Seminar 2009
The Finnish Association of Purchasing and Logistics (LOGY)
Establish United Logistics Group
February 5, 2009; Helsinki, Finland
--------------

Richard Murphy Jr.
President & CEO
Murphy Companies
&
Immediate Past Chair
Council of Supply Chain Management Professionals (CSCMP)

26

Strategic trends impacting logistics in the US

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