Rising Logistics Costs: Inventory Shifts, Not Reductions

Logistics costs are rising, and increased inventory is one of the reasons, according to a new report.

            On the face of it, that might seem surprising. One would think, or at least hope, that the growing implementation of lean strategies would reduce inventory, not increase it. But it turns out that retailers who are achieving reductions are simply shifting the problem on to their suppliers.

            The just-released Council of Supply Chain Management Professionals’ 18^th Annual State of Logistics Report says that in 2006, logistics costs increased $130 billion over 2005 to $1.305 trillion. That makes 2006 the third year in a row that logistics costs accounted for an increasing share of GDP (9.9% in 2006), according to Rick Blasgen, president and CEO of CSCMP.

            The biggest reason for the increase was rising transportation costs, due to rising fuel costs. But that wasn’t the only reason.

            'Inventory costs have risen dramatically because of rising interest rates and because there is more inventory in the system,' said Rosalyn Wilson, author of the CSCMP research report. 'While large retailers are keeping lean stocks on hand they are foisting inventory back on their suppliers, requiring them to stock and re-supply stores more frequently.'

            I don’t know whether this change results from retailers pursuing lean strategies (or what they believe to be lean strategies). However, lower inventories and more frequent re-supplying would be consistent with a lean approach.

            But if that is the cause, then what the retailers are doing is ultimately not really lean. If it were, they would look at the total supply chain, not just their own operations, and they would try to help their suppliers become lean so the suppliers would produce less inventory.

            In any event, it seems retailers and suppliers need a stronger education in lean so they can actually reduce costs and inventory, not just shift them around.

            By the way, the report also makes an interesting point about our nation’s shipping infrastructure, which sounds like it could use some value stream mapping and efforts to reduce bottlenecks.

            'The nation's inland waterway system needs to be revitalized,' said Wilson. 'A single barge can move the same amount of cargo as 58 semi-trucks at one-tenth the cost. Yet, of the 257 locks on the more than 12,000 miles of inland waterways, nearly 50% are functionally obsolete due to a lack of funding.'