C. F. Lynch & Associates

Déjà Vu All Over Again

By Clifford F. Lynch

DC Velocity, September 2004

As business climates go, it’s the best of times in some ways, the worst of times in others. The U.S. economy’s rebounding, positioned for the strongest growth in five years, and GDP’s on a seemingly unstoppable roll. But in spite of (and partially because of) this, the U.S. transportation infrastructure is feeling the squeeze. A surge in imports has caused a container logjam at West Coast ports. The nation’s truckers, already plagued by capacity problems, are reeling from soaring fuel prices. High truck rates are prompting shippers to shift traffic to cheaper intermodal service, threatening to overtax the nation’s rail system. At the same time, the airlines are in a financial tailspin. Thousands of employees have lost their jobs, service is deteriorating and fares are on the rise.

Sound familiar? The year is 1978, and the conditions bear a striking similarity to today’s. If shippers back then felt they were on the brink of a true transportation crisis, they had some cause. The cost of a gallon of diesel fuel had risen from $0.37 in 1973 to $1.50 in 1977 – a whopping 400-percent increase. That fuel run-up, combined with regulated rates and increasing costs, threatened to send the trucking industry into a death spiral.

Things weren’t much better on the rails, on the seas or in the air. In 1978, many consumer goods still moved in rail boxcars, and boxcars were in critically short supply. Shippers that sought relief by signing on with the relatively new intermodal service quickly overwhelmed that system, creating a capacity crunch. Meanwhile, soaring import volumes created a serious congestion problem at West Coast ports. All the while, the airline industry was struggling to adjust to its newly deregulated status.

The comparisons are both obvious and interesting.

Today, we find the economy in its strongest growth mode since 2000, with GDP expected to increase 4.8 percent in 2004 and 3.6 percent in 2005. West Coast port container activity is up 4.7 percent over last year’s levels, threatening to overburden already congested ports. The average price per gallon of diesel fuel is running 20.2 percent ahead of last year, causing well-publicized truck woes.

Things aren’t much better on the rails or in the air. As shippers divert freight from the highways to intermodal service, capacity is tightening and prices are inching up. As for the airlines’ financial health, let’s just say the domestic airlines are expected to lose $3 billion this year.

What, then, did we learn 25 years ago that will help us today?

We’ve learned not to shrug off the problem of rising transportation costs. Warehousing and inventory costs notwithstanding, freight transportation was and remains the primary logistics expense.

Second, we’ve learned that what goes up doesn’t necessarily come down. With the exception of the period shortly after deregulation in 1980, we’ve seen that once freight rates increase, they come down only slowly – if they ever come down at all.

Finally, we’ve learned not to expect quick fixes. Capacity shortages in the system tend to be slow to resolve.

Given the above, smart companies will be taking another look at their distribution networks. Although many have pared their networks down to a few large DCs, a number of companies are either looking into opening a slew of smaller, regional facilities or maintaining larger facilities near the ports.

In light of the current situation, it might be a good idea to review these decisions. The key is to minimize your transportation costs. Move freight as far as you can at lower intermodal and/or truckload rates, and move LTL and package shipments for as short a distance as possible. Although deliberately stockpiling inventories to offset longer transit times may be tough to sell internally, keep in mind that transportation expense is the tail that wags the dog.



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