Inventory-to-sales ratio had the swiftest rise in that benchmark since 1982 across the entire distribution chain--wholesale, manufacturing and retail, report says.

If American transportation and logistics experts got the feeling the past year that the overall U.S. business logistics pie was shrinking, they were correct.

For the first time in six years, total spending on U.S. logistics dropped to $1.3 trillion last year, a decrease of $49 billion from 2007. That’s the gist of the 20th Annual “State of Logistics Report” released by the Council of Supply Chain Professionals (CSCMP) on Wednesday.

The annual respected benchmark report revealed the financial damage done to the sector by the ongoing recession. After rising by more than 50% the previous five years, business logistics costs fell to 9.4% of U.S. Gross Domestic Product last year. That is down from 10.1% in 2007. By way of comparison, that figure was 12.3% of GDP in 1985.

Transportation costs rose 2%, but that was not enough to offset the 13.2% decline in inventory carrying costs, primarily due to record-low interest rates last year. Transportation ($872 billion) now accounts for 6.1% of nominal GDP while inventory carrying costs ($420 billion) account for 2.9% of GDP.

Trucking, which accounts for 78% of transport by revenue and half of all business logistics cost, was particularly hard hit, rising just 1.3% compared with 4.4% for the other modes (rail, barge, air cargo, oil pipelines and forwarders).

For shippers, this has resulted in bargain transport rates, especially in trucking and ocean transport, according to Rosalyn Wilson, the long-time author of the SoL report.

“Abundant capacity, particularly in trucking and ocean shipping, push rates down (last year), often below costs,” Wilson said. “Many companies have not survived the prolonged downturn. Many more will not survive the upcoming months as we continue to ride out the recession.”

As a result of the shakeout—more than 3,000 motor carriers ceased operations last year, taking out approximately 7% of truck capacity—supply chains are being redefined and processes changing, Wilson said.

“The industry will emerge more efficient and resilient,” Wilson predicted.

Economic recovery

Nevertheless, Wilson added, recovery will be a “longer and more difficult journey” for the logistics industry as it awaits meaningful economic recovery, which, Wilson said, will not come quickly.

“It is becoming more apparent that we will see an end to the decline by the end of this year but not a quick recovery,” she said.

One indicator of that is the sharp, record rise in inventory-to-sales ratios, which Wilson called an “unwelcome sign” of a slow recovery. Even with historic inventory reduction rates, the inventory-to-sales ratio skyrocketed from a low last June of 1.25 to 1.46 by December. That is the swiftest rise in that benchmark since 1982. And Wilson said it occurred across the entire distribution chain—wholesale, manufacturing and retail.

Transport pricing

That took a toll on transport pricing. After 6 percent rise in 2007, total transport costs were up less than 2 percent last year. Trucking, the largest component of transport, rose just 1.3 percent. Lower fuel surcharges and tougher bargaining by shippers were cited, especially during the soft 2008 fourth quarter, when truck tonnage fell 6 percent. That decline has carried over into this year, Wilson said.

“I have seen an estimate that shippers are moving 25 to 30 percent less freight nationwide today compared with a year ago,” Wilson said.

Wilson is advising shippers and logisticians to be proactive in preparing for the recovery. She is recommending shippers lock in capacity now with guarantees before space becomes scarce.

“Re-evaluate your relationships with your supply chain partners and strengthen them,” Wilson advised. “Carriers have already begun expressing the sentiment that when capacity gets tight—and it will—they will remember customers who worked with them through the recession.”

That is music to some truckers’ ears. Chuck DeLutis, vice president-field sales for YRC Worldwide, the nation’s largest trucking company by revenue, said his company is discussing supply chain strategies with shippers that are “changing every day, every week, every month. We see it as an opportunity.”

So are railroads, which enjoyed a 10.5% rise in rates last year even in the teeth of the recession, according to the SoL report. Strength in coal and grain deliveries have been maintained by the rails, which are actively shopping intermodal as an option to short- and long-haul truck traffic, especially when diesel prices are rising as they are now.

“Use of intermodal rail will improve as the economy comes back,” said John Lanigan, a long-time veteran of Schneider National who now is executive vice president and chief marketing officer for Burlington Northern Santa Fe, which operates one of the best intermodal truck-rail networks in the country.

“We’re running our intermodal trains 95% on time,” Lanigan said. “I know there are some veterans of transportation who wondered back in the 1970s when we would ever get to 75% on time. Our service now is close to what over-the-road trucking provides.”

Noting that the rails and trucking companies used to be “mortal enemies,” Lanigan said those days are over. “We’re not anymore,” he said. “Three of our 10 largest rail customers are trucking companies.”