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Talking Freight - 2013 Supply Chain State of Logistics Report

August 21, 2013

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Jennifer Symoun
Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Symoun and I will moderate today's seminar. Today's topic is 2013 Supply Chain State of Logistics Report.

Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.

Today we'll have two presenters, Roz Wilson of Delcan Corporation and Libby Ogard of Prime Focus LLC.

Roz Wilson is an internationally recognized supply chain expert with more than 30 years of experience in the transportation and logistics field. She analyzes the performance of logistics and supply chain industry sectors, identifies and analyzes key issues facing the transportation industry and provides insight to government and corporate entities and the press. She is a widely-recognized expert in transportation economics and supply chain security. She has extensive railroad industry experience, and has served in various capacities for over 11 years at the Association of American Railroads. She has more than ten years' experience in supply chain security and resiliency and six years' experience in information security for defense and national security clients. She is the author of the 24-year old Annual State of Logistics Report®, a widely used analysis of the supply chain industry published by the Council of Supply Chain Management Professionals and Penske Logistics. She analyzes trends and provides commentary for the monthly Cass Freight Indexes. In 2006 Roz co-authored Securing Global Transportation Networks, a supply chain security reference and college textbook, which is currently under revision.

Libby Ogard is President of Prime Focus LLC and has over 30 years of experience in freight operations and logistics, including managing freight operations performance levels for private industry and managing transportation data exchange between shippers and carriers. She spent 18 years with a Class 1 railroad and seven years at the North America's second largest truckload carrier, Schneider National. In her time at Schneider National, she managed rail on-time performance to 95% and customer delivery on-time performance to 98% for Walgreens, Family Dollar, Target, and Home Depot shippers for international, domestic, private fleet, and specialized shipments. Ms. Ogard is a past President of the Council of Supply Chain Management Professionals Chicago Round Table.

Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the chat area. Please make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. If we run out of time and are unable to address all questions we will attempt to get written responses from the presenters to the unanswered questions.

The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next few weeks, along with a recording and a transcript. I will notify all attendees once these materials are posted online.

One final note: Talking Freight seminars are eligible for 1.5 certification maintenance credits for AICP members. In order to obtain credit for today's seminar, you must have logged in with your first and last name or if you are attending with a group of people you must type your first and last name into the chat box. I have included more detailed instructions in the file share box on how to obtain your credits after the seminar. Today's webinar is not yet available on the AICP web site but I will send out a notice once it is.

For those of you who are not AICP members but would like to receive PDH credits for this webinar, please note that FHWA does not formally offer PDFs, however, it may be possible to receive PDHs for your participation in Talking Freight if you are able to self-certify. To possibly receive PDHs, please download the agenda from the file download box and submit this agenda to your respective licensing agency.

Finally, I encourage everyone to please also download the evaluation form from the file share box and submit this form to me after you have filled it out.

We'll now go ahead and get started with our first presenter, Roz Wilson, of Delcan Corporation.

Roz Wilson
Okay, welcome everybody and thank you very much for inviting me to be here today to do this. What I will be talking about today is the annual state of logistics report. This presentation is based on an annual report that was created in the 1980s by Bob Delaney, a man who was really passionate about the freight industry and a very big proponent of deregulation. He actually created this model to measure the impact of deregulation on the various sectors of the industry.

The model has three major components: First, inventory carrying cost. This includes the interest on the inventory, but not the actual cost of the inventories themselves.

And then there is transportation cost, which includes non-asset carriers or providers and all duplication has been removed from inter-motor moves.

Then there is all of the cost, which is relatively small. Shipper related costs and logistics of administration.

This model has been calculated continuously and reported on for 24 years and is widely used as a measure of the overall cost of logistics industry in the United States. Other countries have copied the methodology and it is now in use and about a dozen or more economies globally.

The cost of US logistics business rose 3.4% of 2012, is short of the peak 2000, or the most recent peak 2007 level. This logistic cost increased to $1.33 trillion, and that was up $43 billion from 2011. The 2012 continued many of the same trends we have been experiencing since 2010 at the end of the recession. At the end of June, the economy will have celebrated its fourth full-year of recovery. You are probably thinking that there has not been a lot to celebrate.

Once again, 2012 can be characterized by lack of sustained growth in the economy and, by extension, the freight sector. Now that we're four years out and the economy is still experiencing low to slow growth, unemployment levels remain high, job creation is weak and focused on lower quality jobs, freight volumes and rates have been inconsistent, and the trends rarely move in the same direction for more than a couple of months, and the global economy is drastically down considerably, I am wondering if it is time to ask if this is the new normal.

Other than the great depression, no other financial or economic event in the US has created a level of upheaval and economic restructuring as the great recession did between 2007 and 2009. During that period, we lost close to 50% of our net worth, millions lost their jobs and we learned to get the same amount of work done with fewer people.

Sectors of the economy remain lien or right side, for instance the trucking cargo, jet fleet and retail inventories will shrink considerably. Supply chain practices were adapted to be even more in mode agnostics to make the best use of available capacity, reduce cost and bring out even more productivity.

Entire industries had to remake themselves following a less labor-intensive cost model that increased the use of technology to improve quality, but also cut out laborers to cut costs. The US automotive industry in Detroit is a prime example of this. Foreign manufacturers built plants in the US years ago proving that vehicles could be manufactured here at a competitive price.

Detroit automakers had to adjust or parish. I think the single biggest acknowledgment resulted from the great recession is increase productivity across almost all sectors of the economy. Everywhere we have learned to do more with less. Unfortunately, the increased productivity has reduced the need to rehire laid-off worker. Many businesses invested in better software or process redesign rather than invest in human capital. It is much less traumatic to shut off the machine than to fire a person.

I believe that we are experiencing a new order that is translating into a new way of life in the economy and the logistic and supplies chain sectors foreseeable future. The new normal is characterized by slow growth with GDP growth hovering between 2.5% to 4%. Higher unemployment levels and slow job creation will continue. Higher healthcare costs for businesses are encouraging extremely lean full-time staff and a higher reliance on part-time workers who generally do not receive those benefits.

Freight services will be less reliable or predictable as volumes rise, especially when there are periods when capacity does not increase to meet demand. And commodities moving by oceans will have longer and possibly irregular shipping time. Household network and disposable income is expanding very slowly when compared to the growth rate to the decades leading up to the recession, which is recognizing that consumers are much more diverse now.

Household savings rates are rising and consumers are a lot more careful about how they spend their money, if they have any extra after the necessities.

Another example of the change trend is recent holiday peak shipping. Seasons have either been almost undetectable or so protracted that they impacted minimal on capacity and rates. We have changed the way we manage and distribute our inventory with online shopping. We learned that real-time transparency allows us to process orders faster with lower inventory.

The same inventory is used to fill store orders and online orders. If the store does not have an item in the colors as you want, your order can be placed right at the store and delivered to you the next day.

Capacity is actually a big factor affecting the industry and it is affecting it in many different ways, both positively and negatively. Capacity as walking up a fine line between supply and demand with very few shortages reported. Qualified truck drivers have become a viable commodity in very short supply which is becoming more of an issue as the shortage grows from 30,000 drivers today, to an estimated 115,000 needed by 2016.

Ocean carriers continue to manage their excess capacity while battling unfavorable load factors and downward rate pressure. Despite production the number of cargo aircraft, the air cargo industry is still battling capacity which is been made worse by the increased availability of cargo space in the bellies of passenger jets as we all load our suitcases into the overhead bins.

Railroads, on the other hand, are operating quite comfortably and still have about 20% of their rates and storage.

The unemployment rate began to edge down in 2012. I think some people look at this as more important than the unemployment rate is the employment population ratio, which is the percentage of adult Americans who hold a job. That is not budged in three years. In fact, it is at the lowest rate that it has been since 1983, about 57%, according to the US department of labor.

The adult population in the US has increased by about 200,000 people per month, but we are averaging only 173,000 jobs per month. Our job creation rate is not even covering our population increase, much less recovering jobs that were lost.

The US economy lost an estimated 8.7 million jobs during the recession, and has only recovered about 6.3 million of those. As I said, the jobs that are being created are mostly part-time jobs which really are not the kind of jobs we need to get the economy moving the way it was before the recession.

Looking at this visually, there are 12 million Americans unemployed. That is the equivalent of the populations of New York City and Los Angeles combined, according to a pictograph I was looking at on CNN Money. 8 million Americans are underemployed that means they want to work full-time, but they're only able to get part-time. That is the equivalent of combined population of Chicago, Houston, Philadelphia, and Phoenix. There are approximately 2,000,000 Americans who have dropped out of the job market, discouraged workers, that sort of thing. That is the equivalent of Dallas and San Francisco's populations combined.

Those numbers are really staggering. Those images help me begin to grasp the implications of that. Per capita, personal income rose 2.7% in 2012. Much of that gain, however, was in the stock market which tends to benefit richer folks, if you will. Middle class families' wealth is more tied up in their homes, rather than investments, and their housing values are still 26% below their peak. Household wealth is still 6% below their peak. Debt at percentage of disposable income has been dropping. In 2011, and moved up just a little bit because more people dipped into their savings. However, in 2012, the savings rate began to move back up again.

The exports of goods increased by 4.6% in 2012, while imports rose 2.8%. That is considerably slower than the growth that we experienced in 2011. It still represents record highs for both exports and imports. Interestingly, we increased our exports by 39.1% from 2009 when President Obama called for a doubling of US exports. Also, in 2012, the US imported 3.09 billion barrels of crude oil down 6.7% from the quantity imported in 2011. Looking at all crude oil, not just fuel oil, the US was actually a net exporter in 2012.

Let us get down into the business of the logistics system. As I said, and 2012, business increased 3.4%. That meant that the logistics as at cost of nominal GDP remained at the 2011 level out at 15%. What this means is that rate adjusted sector was growing at about the same rate as GDP.

Logistics as a percentage of GDP has always been the magic number and it is a number that everybody looks for every year when this report comes out. When Bob Delaney first started this, we were in the 14, 16, 18% range of logistics as a percentage of GDP until we started to get the hang of deregulation. Once we got the hang deregulation, it started falling and Bob and I had always thought that 10% was the goal to be shooting for.

Well, by the late 1990s and early 2000's, we actually not only met that goal, but began to fall below 10 as we really started getting the hang of globalization and managing our inventories and a lot of different things. However, that dropped from 9.4 to 7.9 that you see from 2008 2009, and then as we are beginning to slowly climb back up, those really do not represent a healthy level. That is a lack of, the drop-off from the amount of freight that we are handling in the system. Not necessarily a representative of what we're doing and that we are doing things better, although, as I said, we have learned some very valuable lessons and have improved a lot of things.

Logistics cost as a percentage, as I said, it is measured in a variety of countries. I just thought you might be interested in seeing how well we are doing against other industrialized countries and growing areas, to see exactly how well we really do things. This gives us our marketed advantage in the global economy.

This is just a look at the entire global before I dive into the details of the component. Caring cost in total was up 4%, transportation cost, which is the largest piece of the model, was up 3%. And again the total overall was up 3.4%.

Starting with the inventory carrying piece, inventory carrying cost posted 4% gain. Interest rates dropped yet again, and inventory levels inched up. It rose in three out of four quarters in 2012, falling only during the second quarter. Inventory levels have suppressed the previous high point, which was established in the height of the recession.

I did not draw the line across; it is not a very good sign when we have our inventories are back up where they were right before the recession started. But there are some good reasons which we can discuss here by looking at the individual components.

You can see the green line, which is retail sales, that has been fairly flat or relatively flat because once inventories got cleared out, retailers pushed inventory back down the chain into the hands of wholesale trade and manufacturing and they expect them to deliver them in that just-in-time sort of way. One thing that you see right here is the wholesale manufacturing, which previously had always been lower -- if you go back all the way to the beginning of the theory, in the beginning of 2009, wholesale inventories have always been smaller than retail inventories. Now that retailers are not holding much extra inventory on their floors or in the back, you see this growth in wholesale trade.

That growth is that the wholesalers do not quite have the hang of predicting things as well as retail seems to be doing right now. Of course, retail has a margin of error because they are expecting the wholesalers to hang on to it. I expect to see that improve over time. Also with the length of time that it takes to have commodities in place and retailers are expecting the wholesaler to be able to provide that inventory when they need it, they have to hold more.

The reason you see the growth, and the manufacturing side of things is because of the low interest rates for holding inventory. I think manufacturers purchase ahead because of the low cost of having that inventory and in anticipation of being ready when the economy picks up.

This next slide is called the retail inventory to sales ratio. What that actually does is it measures how well we are doing anticipating what customers want and what inventory is moving off of the shelf.

The high inventory to sales ratio means that inventory is piling up. Unsold inventory generally has to be discounted or becomes obsolete, meaning that value is lost. Also the cost of the store that inventory with warehouse rents, tax, inventory and insurance cost. You want a low inventory to sales ratio. Unfortunately, it has been climbing up since about the middle of 2012 and is continuing to go up and down in 2013.

Some of that has to do with sales; we had such a bumpy ride. Sales have picked up and then they abruptly drop off. Again, I talked about that trickle-down effect, when sales drop of in retail that means wholesalers will hold more inventories. It has a trickle-down effect on the economy.

The cost of carrying inventory is determined not only by the value of that inventory but also by the interest rate for holding those inventories. We happen to use the annualize commercial paper rates from the Federal Reserve as the interest component for this. It fell from .13% to .11%. As long as we have interest bumping along down there carrying inventory is actually a less lower-cost.

I will move into the transportation piece now. As I said, transportation costs were up 3.0% in 2012. We use the carrier revenues to measure the cost to shippers in the model. Almost posted a modest revenue increase in 2012, but neither rate nor volume growth was particularly strong during the year. The first half of the year was better than the second half of the year, as you can see from this graph per track.

Trucking is the largest angle component of transportation cost and it posted only a 2.9% rise over 2012. The inner-city truck segment was up 3.2% and the local delivery segment was up 2.1. Truck tonnage increased only 2.3% in 2012.

Again, uneven performance is the pattern for the year. The trucking industry has that very delicate supply/demand balance going on right now which could be thrown out of whack a little bit by the new hours of service rules.

The new hours of service rules are expected to reduce productivity by reducing the number of hours that the current drivers that we have are able to drive. The new restart rule represents theoretically a 17% reduction in a standard work week. There are a lot of estimates out there, it is been in effect since July 1 and we really do not have anything to measure at this point.

The big thing to look at I think is truck sales were soaring in early 2012 but the orders came to an abrupt end as traffic slowed. Used equipment is really scarce and the prices have been bid up almost to the point where a new truck with better gas mileage and other features may be a better investment.

Purchases are only be made to replace equipment being retired, rather than any trucking companies adding to their fleet. The exception to that is new equipment that is being added to the fleet to meet the increasing number of dedicated carrier contracts. That means that you have hired a trucking company as if they were working for you, so there is a dedicated carrier so you know you'll get that business and, therefore, you have those trucks.

Despite the shrinking fleet, carriers are still reporting difficulty finding enough drivers. The US Labor Department forecast that truck drivers will decrease in general logistics jobs in the coming years. This is a job category with the fewest potential workers trained to fill them.

Only about 70% of our current driver population is under 35. And a much larger portion of drivers is reaching retirement age. I think there are a number of factors that are affecting driver supply. One of them is that qualification and the high cost of training. The second has been the expanded unemployment benefits, coupling that with what you might call the underground economy, the potential candidates that were receiving very generous and long-lived unemployment benefits and supplementing that with cash only jobs, like personal service jobs, has been enabling them to get by just fine.

Also, private fleet owners are facing the same aging population. They have been attracting some of the most desirable drivers from the other side with better paying working conditions. Also there is a lot more work available which is work closer to home. That's some of the reasons we're seeing some of the problems with hiring drivers.

A quick recap of the rail industry. Rail transportation was up 4.9% that is down substantially from the 2011 increase of more than 16%. 10 miles decreased 1% in 2012. Total car loading were down 3.1% and intermodal volume was the second highest on record. The average length of haul has been dropping for railroads and both average tons per carload and average tons for train fell in 2012 as well.

The road industry is in a very good position as far as capacity goes. They have sufficient equipment and personnel to handle things.

Cost from the water sector declined .9% in 2012. That was another very disappointing year for ocean carriers. Their vessel capacity jumped up 7.2% as demand fell off, very sharply, globally. Deliveries of new ships don't really fall off until 2014 because carriers have stopped ordering them until about mid-2011.

The capacity is expected to rise by another 10% in 2013, making it really difficult to deploy the new vessels without further damaging the industry's dynamic. We had a round of general rate increases of March of last year that they were able to hold for a little while, but dwindling volume forced them to abandon that and engage in a very brutal rate war. Put them farther in the hole. At one point in 2012, about 5.8% of the fleet was idle, in an attempt to shore up rates. When waits firmed up after March, the ships are redeployed, dropping the idle rate of 3.7%. By October, the idle rate had grown back up to 3.7%.

They are engaging in something that is float steaming. It is something allegedly done or it was originally done as a way of saving fuel when fuel prices were rising. Now it is really done to reduce costs in general. What it means is they are not heading across the water as fast as they can possibly go. Between the float steaming and the irregular schedules where ships are trying to add more containers, these are becoming very irregular and unpredictable in the Oceanside.

On this slide, you saw something called the Jones act. It says it is in active debate again. This act is, I'm sorry I cannot remember on the top of my head, but it requires ships operating in the US being able to do coast live, traffic up and down the coast or on the coast in the Gulf, they have to be US built, US crude and US registered. For a variety of reasons, including we are not the world's leading ship makers, and we tend to have higher cost employees, that usually makes the Jones act ship at a disadvantage. If you are not a Jones act carrier, another international carrier cannot come in and take that kind of do coastwise shipping. This just shows you that US ports did not quite have the great year that they had in 2011.

Moving on now to inland waterways: the tonnage for inland waterways was significantly higher in the first half a year of 2012 that it has been for quite time. As you can see from this graph, it fell off dramatically in the second half of their. A lot of that having to do with the drought, as well as global volume, shipping volumes dropping and, therefore, orders are dropping.

There were numerous times when sections of the particularly that Mississippi could travel only in one direction at a time because of the width of the channel would not support a bridge to, despite the fact that the Army Corps of Engineers was providing emergency dredging. Barges were often backed up for days at a time awaiting passage. I one point there were close to 100 vessels run aground and the lower Mississippi.

Shallower channels meant lighter loads, lower speeds and fewer barges, any of which would run up costs. Several harbors were closed at the height of the drought. It is estimated that every inch of drought loss represents thousands of potential products that cannot be moved. And 11 mile stretch of the Mississippi was closed intermittently and August causing queues up to 100 tows. Every single day a towboat is idle, it cost the owners $10,000. No surprise that shipping rates increase close to 25% during that period.

Just to show you how important the waterways really are, take a look at this model comparison chart and look at what you can move on one barge compared to what you can move on railroad, cars or trucks, or in one barge tow.

We should be using the water part of our system a lot more efficiency, I think, than we are. Just to bring it home, look at the time the miles traveled per gallon of fuel based on various modes. Looking at this really makes you want to understand or figure out ways that we can use our waterways more effectively.

Here is a map of what is called the Marine highways now. Look at the extent of this. You can reach a lot of places that we are currently reaching by track and by rail, but look at we can diverge off and reduce the need for more in-depth and some of those. They have direct connections with seaports, great environmental benefits, but on the downside, most of the lock infrastructure has already exceeded its expected life. We need to fix the aging infrastructure. And then we need to build more landside infrastructure to support containers on barges and for translating the other modes. I think with some very well-placed funding along our inland waterways, we could really dramatically reduce the need for some funding that we have in other areas.

One note that I will toss in here, but we will not discuss it at any real length, is oil pipelines. They were virtually flat. But the rate part of that industry is still regulated and they had an upward rate adjustment last year, so pipeline revenue was up 8.3%.

Moving on the air. Airfreight revenue increased 3.1% in 2012. As a tonnage was dropping 2.2%. The big thing that is happening with air cargo right now is despite the fact that they dramatically reduced their fleet to improve their yield factors, as the passenger airline added all of the charges for checking baggage, so we are not caring our baggage aboard. That increased the amount of space available in the belly of the aircraft. Passenger jets now are skimming off the cream, if you will, in domestic cargo. For them belly cargo is very profitable because basically the costume of the aircraft is already covered with the passenger revenue. So their profits are estimated to be close to 65%. They are marketing that very aggressively.

Another very important part of the industry is the third-party logistics freight forwarder part of the market. You can look at those as the middleman, almost like the consultant or subcontractors for shippers. They arrange all the carriage. They tend to be very low diagnostic. They are looking for the cheapest way to move that freight, whether it is a combination of rail or truck or whatever mode -- you can move it on a donkey if you can make it cost effective.

This is been a growing part of the industry. They did have their low spot when there really was not allowed to move in 2009. But for the most part, you see they have been climbing. They have been climbing because the more difficult environment we are in, the more shippers will concentrate on what their core businesses and let the people that do the logistics piece, the transportation piece best, do what they do. We have seen an increase. If you take a look at the next light, that 3PL market can be broken into these four segments.

The segment that has been growing the fastest has been domestic transportation management. That is because more and more carriers, especially as they are beginning to anticipate that we could have some capacity problems, are beginning to engage 3PL companies. They're generally not asset so they do not have to worry about the asset utilization when they're making their decision about how things are going to be moved.

I have actually talked with several companies that hired more than one 3PL in the expectation that there will be some truck shortages. They want to be engaged and have put themselves in such a position that they know that what they need will be available.

Looking at what is happened so far in 2013, we have had a slow start as far as manufacturing went. In fact, manufacturing was contracting for good part of the first half of the year. It has started expanding in the last couple of months. New orders are back up, productions backup, but the backlog of orders are still declining.

One of the things I always look at in terms of figuring out what we are going to be moving here in the US in the coming months is what is going on in China. China's PMI rose last month after about five months in a row of decline. If you take a closer look at their PMI only their domestic part was up. The new export orders and backlog are still contracting. That means we are not placing orders. If we are not placing orders, there will not be things to be moved.

Signs that the economy has been straightening has been the growing number of new jobs created. Existing home sales and residential construction was up a bit in the first half. Experts have been growing despite the shaky state of the global economy. And I think we are going to have something that we may be able to call a holiday peak shipping season this year. We might have to change that to a holiday bump because I do not think it will be very big but unlike other periods, and may be measurable.

Things to look at that on the negative side, are a lot of that employment growth has been a part-time jobs. Our freight volumes have been really volatile and inventories are high and are staying on the shelf longer. And consumer confidence has been rising but they are still hanging onto their money.

Let us just take a look at what freight sector employment has done in the last decade. You can see it dropped off dramatically after the recession, and has been climbing steadily. But we are not anywhere near where we were before, but we are at an adequate level, a pretty good match from what we are actually moving right now.

This illustrates very well what I was talking about how bumpy volume has been throughout the year. We just do not see any sustained trends in here to be able to say we are on our way. I do not think we really are on our way, I think we will continue on the bumpy ride that we have had. At least it is a bumpy ride that is moving up.

Another way of looking at this is the Cass freight index. One of the measures the expenditures for freight on a monthly basis and the other measures the number of freight shipments. I think one of the most interesting things about this graph is looking at how tangled the last three years have been.

The fact that we have the upward climbing expenditures for freight really has not really been a reflection of increased rates to any great extent. It has had a lot more to do with heavier loading. While shipments of that there declining here, loadings are being measured here and average loading has increased.

We do see a tremendous amount of increased costs on the side of the carriers. Some of this has been trying to recover that, but we are certainly not seeing any rate gouging or increase the rates that you would see normally from a purely supply and demand point of view that you would have expected to see in the trucking industry.

This is just to give you an idea of what other we are expecting for the rest of 2013 as far as annual manufacturing growth. As you can see, there is nothing in these numbers to write home about. The only thing that I think may actually turn out to be not quite as bad as it is here is Europe. It has two months in a row that they have had a positive economic growth. I do not believe that they are out of the words by any means, but two months and the role of positive growth for the Euromarket is actually pretty substantial.

Again, I look for the key trends that would tell us whether or not we can expect to see some substantial growth and I am really not seeing that in domestic numbers or global numbers.

To sum up, 2012 really was not a great year from an economic perspective but the freight sector saw a modest improvement. Current economic conditions globally really do not support a robust Outlook. But here in the US we seem to be settling down, manufacturing seems to be picking back up. As I was preparing my outline to do this year's report, I found that there really was not any truly new story to tell.

When I studied my last two previous reports and looked at my expectations for 2013 to 2015, my conclusion was that the trends were not going to be materially different than they have been for the last three years. I do believe that the economy and the logistics sector were slowly regaining sustainable momentum, but we will still experience unevenness and growth rate. This is the new normal. Ready to pass off to Libby.

Libby Ogard
Thank you by much. Excellent job, Roz, I always enjoy listening to the State of Logistics findings, each time I pick up on different aspects of the report.

I wanted to do is recap on what Roz just told us. She mostly focused on "what does logistics mean to the economy" and how are changes in trade patterns and regulations going to impact our logistics complex?

From here I will pick up and focus on how "logistics impacts public transportation planning". As we all know, freight seeks the path of least resistance and often lowest-cost. Reliability is essential for planning. We heard about private sector partnerships between modes and modal partnerships between, truck, rail, barges, ships, air cargo, as well as pipelines and warehouses.

Across all those modes, visibility is essential, especially when exceptions occur. Freight transportation contracts are often awarded based on on-time performance and lowest cost service. How will changes in freight patterns change public freight planning efforts?

Site location managers look at many factors including zoning, energy costs, and access to highly efficient freight corridors. The private sector is collaborating, for example truck and rail modes work together to deliver intermodal service. The public sector agencies must also collaborate for example Dot's and Economic Development Agencies.

Next I would like to recap and example of how changes in Hours of Service may impact long haul trucking lanes. If we look at the rules that just went into effect recently, FDR Associates estimates that this policy alone is likely to reduce our driver capacity by approximately 60,000 drivers due to lost productivity.

For example, if we look at a long haul lane between Chicago and Houston, which is 1091 miles. MapQuest estimates this trip should take about 18 hours and 6 minutes; it is normally a two-day trip. Yet given the state of our transportation network, unexpected accidents, peak travel congestion, weather delays, detours, construction, or any variety or combination of uncontrollable impacts, can you see that these events can have a detrimental impact, especially on long haul traffic lanes of 1000 miles more. These conditions impact site selector decisions.

I also wanted to talk about warehouse location analysis and the first and last mile. This chart shows black factories and red distribution centers. The blue arcs show truck lanes. As Roz talked about in her presentation, between inventory, warehousing and fuel costs, site location and networks can change to meet the budget constraints and customer needs.

These are things that are very hard for the public sector to respond to and react to in planning. The Herbert W Davis group completed a survey of supply chain managers and logistics costs. If you look at the total transportation costs, regardless of mode, whether it is rail, boat, barge or truck, transportation costs usually amounts to about 50% of the total cost of logistics. Inventory cost is about 22%. This is a very dynamic chart that could change based on the inputs to supply chain costs.

I wanted to take a moment to thank a couple of my trusted colleagues who I reached out to a couple of days ago and asked them to comment on a couple of conclusions I drew from the state of logistics report. I would like to share five takeaways.

The first takeaway is that logistics is dynamic. Transportation and mode choices are ultimately made by the customer and/or the producer. While government may impact freight decisions, collaboration is key. Freight projects take a long time and we need to start early if we are going to be looking at new facilities or new modal connections.

The next key point is: don't fossilize your plans. This is a great way to keep your private sector engaged; increasing logistics IQ increases your credibility and teaches you how to ask the right questions. The state of logistics tool is an important document with over 24 years of history and can give us some insights on how we reacted to dynamic changes in the past. In addition, how trends may influence transportation patterns in the future.

Take away number two, more important now than ever is engage a freight advisory committee. Understand that what seems intuitive to you, may not be understood by the logistics community. Engage the economic development community, core agencies and shippers to understand what is coming your way. An example is the Philadelphia MPO; DVRPC has recently seen a spike in pipeline activity due to some of the changes in our shale gas production. That is causing them to rethink and relook at some of their local planning priorities and access points to pipelines. Keep in mind that things change and we need to be flexible when these changes occur.

Freight issues extend beyond political boundaries. World issues are often different than urban issues, especially along critical corridors. In many cases these issues are different.

Thing global but act local when it comes to emerging trends. Think about imports, exports, and how they impact your community. How will your region participate in the export growth? How will you be impacted by near shoring and the burgeoning manufacturing renaissance? Working knowledge of these issues will increase your level of discussion with your private sector counterparts and will result in higher quality transportation input and discussion about how some of the changes might affect you either locally or on a regional basis.

Avoid being out of step with the private sector partners. In the Midwest, there are two examples that come to mind: Number one, windmill blades. We saw windmill blade movement boom when we had a stimulus package that was promoting alternative energies and now that tax credit has not been renewed we are seeing a drop in the movement of these windmill blades.

The same is true for ethanol as we reach blending caps. We are not seeing as much ethanol move because the demand for gasoline is not growing as fast as historic trends would suggest. As a nation we are driving fewer miles in more fuel efficient vehicles.

Take away number three, MAP-21 will require more freight performance measures. The state of logistics report can help you tell the story about how logistics demand may impact your road conditions, bottlenecks, reliability, congestion and safety. This focus will be of interest especially for economic development partners and site selectors.

Supply chain risk managers are concerned about performance on a daily basis and also in times of natural disaster or other unexpected disruptions. Performance measures are used in network planning models to help identify transit times and transportation service windows. These models are very sophisticated tools, which shape the distribution networks today and in the future.

Ensure performance measures are directly linked to state or MPO strategies, goals and objectives. Start small, mobility is often a good place to start.

State and MPO's will want to measure performance that matters to the communities and specifically shippers, receivers, carriers and warehouses. Recognize that rural and urban shippers, receivers, carriers and warehouses' may have a different focus on these measures, depending upon the type of commodities they are moving and the speed with which they need to move.

This State of Logistics report can be a very good tool to help diagnose some of the transportation problems that you might see as result of some of the performance measures you manage.

Take away number four. Public-private partnership investors will select projects to capitalize on these trends. Are you prepared? Modes will continue to innovate, in Chicago, a public/private partnership deal with the port of Chicago was done to increase its competitiveness and bring needed capital to upgrade a port which had not made substantial capital improvements since the 1980's. This new investor will likely increase traffic which seeks pipeline access, as well as prioritize highway connector and links to rail ports, in and around the region.

Public/private partnerships, are they done in desperation for funding or to improve efficiency? We all know that budgets are lien but I think we can also point to some productivity improvement examples. Chicago Create is a great example where a project was conceived of to improve efficiency. Public and Private sector partners collaborated and made investments to improve passenger and freight rail networks, while at the same time reducing grade crossing delays.

Know your tools and revelatory environment. Not all States are able to participate in public/private partnerships. If you can see the trends coming particularly for new intermodal terminals, are your policies favorable for new development opportunities which might promote growth in existing or additional facilities that your private party may be looking at.

TIGER grants require a match. If the TIGER program continues, it is important to begin with a match. Think big. Examples where substantial private sector investments were added to these projects include the Crescent corridor and the Heartland corridor. Freight must conform to each State's regulations, establishing efficient corridors help improve transportation productivity.

Good freight connections and logistics can be an economic development driver, not just a congestion problem to be managed.

Our last take away is plan for freight as a whole, avoid silo approaches. Collaboration at all levels is essential especially between states, MPO's and other public agencies such as port authorities. Recognize the multimodal aspect of freight and supply chains which will require collaboration, especially between modes.

Information on the state of logistics can help DOT's, MPO's meet their federal guidance for states rail plans, especially in the area of economic context of state freight systems. Some examples might also include supply chains within your state, performance goals within the state, and specifically, sections 2 and 5 of the state freight plans.

The state of logistics report is also a good tool to gain traction within your agency and policy leaders. Before you start your freight plan, this maybe a good primer to begin with.

Private sector discussions are always based on total landed cost. It is important to consider the supply chain and logistics costs which are passed on from producer to consumer and all along the manufacturing and distribution in between, from first mile to last mile.

With that, I wanted to sum up by saying that more information can be found on the Council Supply Chain Management Professional's website which is CSCMP.org. You can also find a local roundtable that will have events on a monthly basis and will give you an opportunity to hear from experts in the field about all types of logistics operations and impacts. There are also a number of research reports and white papers posted online.

The annual conference issue will be held in Denver between October 20th and 25th.

Roz Wilson
I just wanted to add to our Libby said. For public sector, per Mary local and MPO, going to local roundtable is a great way to engage local private sector organizations that place a high value on logistics and cooperating with others that are local.

Questions & Answers

Jennifer Symoun
Alright. Thank you, Libby, and thank you Roz as well. We will now move on to the Q&A session. I think I will start at the top and move down. I know there have been a few things that have been answered within the chat box so I will skip over those.

Roz, federal law currently forbids on crude oil export. Please describe how the US has become an exporter in 2012.

Roz Wilson
That is a difficult question for me to answer at the top of my head. I have the reference that I used to make that statement that has the numbers behind it and I will be happy to supply that. I do not have it right in front of me.

Jennifer Symoun
Alright. Thank you. Next question for you was there a significant shift on bulk traffic such as grain, etc., away from barges onto rail on the Mississippi River quarter in the summer of 2012?

Roz Wilson
Actually there is not a big shift as has happened in the earlier event. Part of that has to do with the fact that the grain crops were also severely affected by the drought and the crop numbers were down as well as global demand was down. I do not think -- I think for a period of time, yes, but overall, no.

Jennifer Symoun
Okay. How do I hold my trucker liable for late or no show fines? Deducted from my account by retailers?

Roz Wilson
That is way, way out of anything I know how to answer.

Jennifer Symoun
Alright, we will skip over that one. The law allows retailers to penalize the supplier for late arrivals. Is the supplier able to hold a carrier for such fines?

Roz Wilson
I have to say, to be completely honest, -- to be completely honest, I'm not aware that a law allows or requires any those things. I think it is probably just common practice. I do not negotiate these kinds of contracts, but I do believe those are part of contract negotiations and not that there is a law that covers that.

Jennifer Symoun
Okay. Thank you.

Libby Ogard
The last two questions highlight an area which falls between the carrier and the contract holder. As you saw in some of the charts that Roz had, there is an increase in the number of 3PLs and the activity within the 3PL sector. One of the reasons for this growth is if you are struggling with on-time performance or if you are struggling with some of the issues such as chargebacks, a 3PL can often help bridge some of those issues.

Jennifer Symoun
Alright, thank you, Libby. For a community embarking on the task of modernizing its local relations and development centers, what are the three most important changes to consider?

Libby Ogard
Look at are hours that trucks are allowed to deliver, are there curfews? These vary depending on a rural or a very urban environment. Does your community impose light or noise regulations which impact loading or unloading hours. Make sure that your connecting roads allow trucks and can accommodate truck turning radius. Is there sufficient truck parking? What land use and zoning is in place which might impact sustainability, some new developments are trying to be very green and are trying to enforce specific regulations around water runoff, as well as trash and light/noise pollution.

Jennifer Symoun
Thank you. I think there was clarification there that the question was referring to a metro area.

For inventory measurements is Amazon considered a wholesaler or retailer? And do you see the Amazon model of retail delivery to be a growing trend?

Roz Wilson
That is actually a very good question. The answer to that question is yes. What we are experiencing now or what we are calling multichannel distribution. We have the same set of inventory as players involved in supplying the store, making home delivers, doing business-to-business, and so that is kind of blurring those distinctions between wholesale and retail. We actually had, at the transport 3PL conference, there was actually a whole session in which we were discussing new trends. And we may have to change our nomenclature and the way we are referring to things to more accurately reflect what is really going on. By the way, that is becoming a way of being able to manage with a much lower level of inventory. If each part of your operation does not have to maintain its own inventory, the ones where inventory is being used to fulfill multiple channels of sales and delivery. I did not exactly answer your question but it is because there is not a direct answer. I can tell you from the retail sales tax perspective, Amazon is a retailer in states in which it has some kind of distribution or other facility. I guess it is a wholesaler or distributor in states in which it does not for tax purposes.

Jennifer Symoun
Alright, thank you. Another question while states are waiting for the federal guidance for the primary freight network to be released, do you think the scope of the 27000 Center Lane. This might be too limiting for our extensive years rate US freight highway network. Would you suggest that threshold be increased under the new reauthorization bill?

Roz Wilson
That is a tricky question. I have been working a lot with the proposed 27,000 miles, I have also been working with local governments to add what they were calling some of the rural components into the additional miles. I think the answer to that is going to be that no matter what 27,000, 25,000, 30, 25,000, 30- someone is going to feel they were left out. Since we have not really had a chance to look at completely what is being proposed and what is being proposed and justify, I do not think we have a very strong rationale for saying something different should be put out there.

Libby Ogard
I think it is important that we all think as multimodally as possible. I do not want to advocate that we have too many or that we do not have enough, but I think that the notion is we need to look at all of the modes for future capacity as well as redundancy. As Roz shared with the inland waterway system, as well as the rail system, we may be see shortages in the truck network, yet we still have capacity in a marine or rail network. We need to consider how all modes can complement each other.

Roz Wilson
I think the primary freight network should be just that. It should include, as Libby says, almost, it should not be just the center mile thing. It should be multimodal. Then we should consider things that might not just the centerline mile or miles of track or navigable channels, we also need to be looking at the multimodal connectivity. You cannot really look at the freight network as a single measure.

Jennifer Symoun
Alright, it looks like maybe a few questions are coming in. I do not see anything else right now, but it looks like somebody is typing something so we will give a minute or so for that to come in.

I see somebody did typing clarification to the question about crude oil. Crude oil exports are allowed to export into Canada and consumed in Canada. I do not currently see any other questions typed in. I will start reading the close out and if something comes in, I will drop out and go to the question. Before I do that, Roz and Libby, is anything option want to add because we some time before we close out?

Libby Ogard
I would add to any state that has a border with either Mexico or Canada, will see increases in NAFTA freight movements between all the three nations in North America. If there was a focus or something to look at in the future, cross order activity and efficiency is essential.

Roz Wilson
And, Libby, you brought up in one of your key points the near shoring of manufacturing renaissance. One of the things to look at with that is the near shoring or adding manufacturers over the US really does not mean that we are moving our manufacturing capacity. The demand for the products that we are manufacturing globally has grown significantly in the countries where we have placed those manufacturing plants. In order to continue to service those new customers, we will leave those plants in place. It is beginning to look more like total landed cost -- from a total landed cost perspective having more manufacturing that is serving this hemisphere, being done in this hemisphere, it looks like that may be the way to go in the future.

Jennifer Symoun
Alright, thank you. Let me see -- we have a comment typed in and I want to give you two a chance to respond to that. The model comparison information in the resection is really outdated. See the study done by Texas transportation Institute that is available on the waterways Council website. Roz, I do not know if you want to comment on that.

Roz Wilson
I thought that is where I had called from the waterways Council website. Those were to slides that I added in based on our conversation the other day, not ones that I usually have in the state of logistics pack. I do not know which part of them was outdated, but if I pulled -- I am not sure which ones you're talking about, whether it is the amount that you can put on a barge versus the fuel, but I apologize if those are not the latest available. My source was the Waterways Council for the fuel one.

Jennifer Symoun
Alright, thank you. Another question just came in: How sensitive is logistics as a share of the economy the changes in fuel prices?

Roz Wilson
We have not seen it fuel prices, even though they are substantial cost element for most of the modes, we have not really seen fuel prices being enough to throw the percentage -- positions cause of percent of GDP up or down tremendously. We did have it contributed when we had that run up of fuel prices before the recession, when fuel was such a big thing and so volatile. We did see one year where it did add significantly to cost, but it tended to be cost increase and there was a delayed increase in rates because we had not had fuel surcharges do not tend to go on as fast as fuel prices are going up. But they certainly, off as soon as fuel prices go down. It is not that big a percentage as you would think it would be.

Libby Ogard
In 2009, we saw a number of small trucking companies go out of business, specifically related to the issue that Roz mention. Often independent owner/operators are picking up loads that do not have contracts where the fuel surcharges get passed on. Particularly in a situation where we see rapidly escalating fuel prices, we often see a lot of small companies go out of business because their profit margins cannot absorb fuel price spikes. This small business failures impacts the driver shortage. While you may not see it in the freight rate or bill today, you may see it in the future in terms of reduced capacity, which would potentially lead to increased rates for freight movement.

Jennifer Symoun
Alright, thank you. How are taxing online purchases affecting the freight economy?

Roz Wilson
I guess that will depend on how much do you think that will discourage online purchasers -- online customers if they suddenly have to pay taxes. I can speak for myself and it will say that the convenience of having it delivered to my door the next day versus going out and going from store to store, I would have to take that if I went and bought in the store so that will not impact my decision. I do not know if there are a lot of people who are buying online because it can save taxes. I have a feeling not. I do nothing it will have -- I do not think it will have a great effect.

Libby Ogard
I don't know if any of you have been following Amazon.com. They are rolling out a new valet service. This service allows you go online and place an order, Amazon will find that product close to you and if you pay shipping charges for a certain minimum value, they will provide same-day delivery. In some markets the delivery can be within in number of hours. The valet service would be offered in the Bay Area as well as New York. They are looking to expand in Texas and Chicago as a second phase. One of the issues Roz mentioned earlier is how internet businesses are classified. Amazon is considered a retailer if they have a distribution center in that state and a wholesaler if they do not. Amazon currently does not have a distribution center in Illinois, yet that is one of their potential markets they will open new valet service in the future. How will this impact congestion around an urban area that is already congested? They will need a lot of tracks to make the delivery commitments. These are all interesting questions.

Jennifer Symoun
Alright. Thank you both. I do not see any additional questions at this point.

Thank you all for attending today's seminar. The recorded version of this event will be available within the next few weeks on the Talking Freight website. The next seminar will be held on September18. More information about the topic of this seminar and a link to register will be available soon. I will send a notice out through the Freight Planning LISTSERV once it is available. I encourage you to join the Freight Planning LISTSERV if you have not already done so. Enjoy the rest of your day!

Updated: 09/18/2013
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