I've long been an observer of logistics - the movement, storage and deployment of goods and services from where they start to where they're needed. General Omar Bradley noted that "Amateurs study strategy, but professionals study logistics". Logistics underpin and make possible (or impossible) every other military activity. The same applies to economies as a whole.
I was taken aback to read this week just how expensive commercial and industrial logistics have become over the past year or two. The Council of Supply Chain Management Professionals has just published its 2023 State of Logistics report, and it's a doozy. The Loadstar reports:
Although freight rates retreated in most modes last year, supply chains remained eye-wateringly expensive ... US firms saw their logistics costs surge to almost 10% of national GDP.
The report, produced with findings from consultancy AT Kearney, notes that logistics costs soared 19.6% last year, to $2.3trn – 9.1% of US GDP.
Far and away the biggest factor was inventory and carrying cost, which almost doubled, going up 90.2%, fuelled by a succession of interest rate hikes. Warehousing rents stayed in the stratosphere as slower demand was more or less matched by a deceleration of new facility construction.
On the transport side, the maritime sector (including inland shipping) saw the strongest increase, costs rising 18.4%, followed by rail, up 17.6%. Trucking costs were up 6.2% in the truckload sector and 6.4% in the LTL arena. Parcel costs rose 4.7%.
. . .
They are more upbeat on e-commerce, although growth flattened as consumers returned to stores and allocated more money to services. Volumes declined 2%, but are expected to grow at a compound rate of 5% over the next five years – an outlook particularly bullish for same-day deliveries, where revenues are expected to rise to $7.9bn in 2027, compound annual growth rate of 18.8% over 2022.
There's more at the link.
Those numbers are mind-boggling when you think of the scale. In so many words, nine cents out of every dollar spent or generated in the United States is being spent on moving and storing goods for sale. Literally everything you buy adds that cost to the other elements that make up its price. The slightest inefficiency, or delay, or disruption to a supply network makes the logistics share of your purchase(s) more expensive.
In that light, all those companies offering "free shipping"? They're not. They can't possibly afford to absorb a logistics cost that high, across their entire product range. They've simply folded that cost into their overall pricing calculation. If you're not paying it as a shipping charge, you're paying it as a higher price per item. "Free" is worth precisely what you pay for it - nothing.
This may sound obvious, and unnecessary to emphasize, but we can and do lose sight of it in the day-to-day minutiae of existence. At the time of writing, US GDP stands at $26.53 trillion. In current dollars, at a 9.1% logistics cost, that means this nation is spending $2.41 trillion every year on moving and storing goods. That's about the same, or slightly more than, our current annual federal deficit, depending on whose figures you believe. (Hint: if a politician provides them, don't believe them unless independently verified.)
Peter
12 comments:
Horse puckey.
Most firms have no "warehousing" as such.
That was the whole point of the Just-In-Time model.
The only "warehousing" going on, in most cases, is on the shelves, and the biggest problem is that the stuff nobody wants stays forever, with little turnover.
That's mostly due to lazy idiots hired to manage stores by computer and master-display, which leads to having eight varieties of chocolate chip cookies or shampoo or razors, and none of the one or two everyone buys, because those were all sold minutes after they were stocked on the shelf. And the next batch is somewhere between China and here, and might get here in two months, and be sold out again in a week or a couple of days.
It's like the jackholes running retail were trained by the head of the Soviets' GUM department store, because they've trained people to buy thirty of something they only need one of, because once it's gone it'll be weeks or months before they get any more.
The is retail management by retards.
It only gets worse for higher-end items like refrigerators and cars.
There is an upside to this. According to Peter Zeihan because of the increased cost of shipping coupled with the increased labor cost due to demographic collapse caused by their own "one child" policy, the only profit margin left in sending manufacturing to China is because of the sunk cost of building manufacturing facilities. Manufacturing facilities wear out and require periodic expensive re-tooling. Manufacturing is coming back to North America but will probably all end up in Mexico. If we had intelligent leadership (which we do not) we would be trying to figure out a way to get right with Mexico because we're going to need them.
The lockdowns and disruptions nuked JIT from orbit - 2x for global supply chains.
The Whirlpool at the local YMCA has been down for months as the parts needed to fix it are stuck in the Supply Chain in China.
I worked for a manufacturing company, and many of our customers used Just in Time inventory. Problem was, if we hit a snag, or couldn’t get the raw materials, we couldn’t expedite their order sometimes. The truckers got delayed and couldn’t deliver on time. One customer ordered every single day, instead of bundling several days into one shipment. They were frequently out of something and called for another shipment ‘has to go out today! By express courier!’ It was nuts to deal with.
I believe in on shelf inventory and better management.
Southern NH
While it's hard for me to think people really believe there's "free shipping" it's fundamentally the same as thinking they can "tax corporations" and it won't get passed into the price.
I happen to work for a manufacturing company as well in the division that supplies replacement parts. Since 2017 our shipping costs have gone up 400% with motor freight and over seas shipping being the worst. Amazingly, UPS has had the smallest increases.
TANSTAAFL-There Ain't No Such Thing As A Free Lunch. You may not be paying for it, but someone is, and that piper will be paid.
Most organizations have major problems with their inventory and sale tracking software - it simply doesn't keep accurate track of what's where, and why, primarily because of faulty inputs (and "delay" is a fault).
Quite a few organizations have inadvertent "warehouses on wheels" because a lot of inventory is either on its way to them or on its way from them to the customer. Brick and Mortar organizations operate at a disadvantage because while you can go to the store for a common item they do not have the space or personnel to stock what a 6 acre computer operated, fully automated warehouse system can. Look at how much hands-on grunt labor is required to keep the shelves full at your local grocery store, then multiply that by every single B&M retailer or wholesaler. (And a lot of that same grunt labor goes into putting stuff on Amazon shelves so a few hours later it can be plucked off and boxed to land on your porch tomorrow).
I look at Amazon and wonder; almost everything they sell can be delivered in 2 days, some 1 day, some same day. That cannot be accomplished without having that item already in hand and accessible. Prime (currently at $140/yr) is not adequate to cover the related delivery costs, even with cut-rate subcontracting to local logistics firms. That Amazon offers "digital discounts" for grouping deliveries on one "Amazon day" are testament to the cost burden (if Amazon ever figures a way to make next-day delivery of 4X8 sheets of 3/4 plywood and 8 foot 2X6s economical Home Depot and Lowe's will become merely a memory).
I expect, and am surprised it hasn't already happened, but tiered delivery is one option; so-called "free delivery" (which isn't the slightest bit free at all, that cost is buried somewhere in the product and/or process) which gets the item, or groups of items, to you in, say, 7 days (much like Amazon's weekly "Amazon day" delivery offers), versus multiple levels of options or urgent delivery for which there is an added fee.
Sooner or later there will come a tipping point, some of which we're seeing already as individual companies "just can't keep up" with the economic and performance pressures that a highly competitive material goods environment demands.
As someone who sells on eBay, I can affirm that the "free shipping" is not eaten by the vendor. It is always figured into the price of the item. Most items I sell are listed as "plus shipping", not "free shipping" I feel that this is more straightforward.
Living in Montana, I'm regularly reminded of shipping costs, often by what we don't have rather than by what we do have. The lament deals most often with some fast food chain or, less often, with a retail store. Usually I'll just frown and nod but occasionally I'll talk about economies of scale and how it doesn't pay to supply one or even two locations from a warehouse over 500 miles away (both Denver and Salt Lake City) with no stops along the way to help pay the freight.
We've even lost some of what we already had in part because product costs combined with rising labor costs made them unprofitable. Despite what many want to believe, businesses do not exist to provide jobs.
I have a repair business, and I buy all my stuff on line. When I shop, I always compare prices, shipping, and shipping time. I also combine my purchases to cut down on shipping, whether I'm paying for it or the seller. I also note my frequent purchases to see where they come from and I compare the costs from ebay or amazon to their own website.
Also, and this is important, I bill my customers for the price, with shipping separate. Shipping is not subject to sales tax, so it is a way to starve the beast just a little bit.
A whole 9% on logistics, huh? How does that compare historically? I have no data but I'm going to take a wild guess and say that that is absurdly low by historical standards. Think about the markups on silk and spices in Medieval and Roman times. How about the markup on wool? Wool merchants grew very rich.
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