1.5 Logistics and the Economy

In terms of trade and economic development, logistics makes the world go round. At just over 9% of gross domestic product (GDP), the United States has one of the most efficient, lowest-cost logistics systems in the world, though shortages and economic shocks during 2022 pushed costs much higher.

Why should you care? As Figure 1.5 shows, typical logistics costs as a percentage of GDP vary significantly by country. Efficient and effective logistics can give your company a competitive advantage by lowering the total landed costs of products. Lower logistics costs also free up money to invest elsewhere in the economy.

For the US, logistics costs have been around 7-8% of Gross Domestic Product (GDP)The monetary value of all the finished goods and services produced within a country, generally calculated on an annual basis. for the past 15 years (see Figure 1.6). Logistics costs, however, jumped to 9.2% ($2.14 trillion) in 2022 and 10.5% ($2.31 trillion) in 2023 as companies dealt with the snarled global supply chains caused by the COVID pandemic. Logistics costs are now coming down (8.7% in 2023), but remain above the long-term trend line. Pricing instability also persists.1

By contrast, in China, logistics costs average almost 15% of GDP, nearly twice as high as in the US. Why is this important? More efficient logistics in the US help offset China's labor cost advantage. However, this advantage is diminishing as China continues to invest heavily in logistics infrastructure, something the US has failed to do in recent years

The numbers show that logistics is a huge industry—and both an economic driver and a creator of jobs. Figure 1.7 breaks down total logistics costs by value-added activity for the United States. For the US, motor carrier transportation is the biggest single expense category. Almost every item shipped in the US is on a truck at some point in its journey. How do these costs vary from country to country? Emerging markets spend relatively more on inventory due to their less efficient transportation and road systems. Poor infrastructureThe processes, equipment, people and flows that support a particular industry or activity. For example, logistics infrastructure includes information systems, roadways, airports, truck drivers, distribution centers and much more to make logistics operations possible. creates greater uncertainty in lead-times for shipments and higher levels of obsolescence.

You may not be aware of this, but in 1981, when interest rates were high and before US companies started implementing lean practicesEliminating all processes, steps and materials that do not add value. , logistics costs as a percentage of GDP were 16.2%. At that time, inventory carrying costs alone were 8.3% of GDP. Transportation costs were about 7.3% of GDP. Administration made up the difference. How have logistics costs changed since the 1980s?

• 1990s: By the mid-90s, improvements in inventory management and better information technology contributed to a reduction in logistics costs to 10.2% of GDP. Inventory costs had been cut in half to around 4% of GDP. Transportation costs had declined to around 6% of GDP.

• 2000s: By the early 2000s, logistics costs declined slightly to between 8-9% before surging to almost 10% as global trade increased. Higher levels of exports required growth in inventories. Logistics costs then settled into a 7-8% range until the COVID pandemic.

• Today: Volatility is perhaps the best descriptor of logistics costs—and performance—today. Logistics expenditures increased 24.8% in 2022. Demand, and costs, then fell sharply in the first half of 2023. Wars in Europe and the Middle East have destabilized logistics. For example, Houthi attacks on ships passing through the Red Sea has diverted traffic from the Suez Canal, raising costs and creating delays.2 And a drought in Panama has lowered water levels slowing shipping traffic in the Panama Canal.3

  To summarize, although logistics spending dropped 11.2% from 2022 to 2023, it is still 10.9% higher than in 2021. Moreover, disruptions abound, and SC leaders are redefining what the right global footprint looks like. Economists and SC managers are asking, “What will logistics’ new normal look like?”

Your takeaway: Companies have spent a great deal of effort to lean out or optimize logistics. They have reduced excess inventory, movement, and packaging by filling up truckloads out and backhauls in return. They have also deployed logistics assets more productively to offset fuel cost increases. All of these efforts have reduced your cost of living, leading to an increased standard of living!

However, given today’s SC disruptions, many supply chain professionals believe that companies may have gone too far in their quest for efficiencies, leaving them with few buffers to bounce back when the unexpected happens. Hindsight is 20/20.