Companies Face Rising Supply-Chain Costs Amid Inventory Challenges
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Companies face new increases in logistics costs this year as they try to reset their supply chains and rebuild inventories amid continuing disruptions and rising inflation, freight-sector experts say.
The renewed cost stresses follow a year in which business logistics costs rose 22%, straining shipping budgets as companies struggled to adjust to rapidly changing consumer demand, according to the latest annual Council of Supply Chain Management Professionals State of Logistics Report, released Tuesday.
U.S. business logistics costs increased in 2021 to $1.85 trillion, representing 8% of the country's overall economic output, the highest share of logistics spending relative to gross domestic product since 2008, according to the report.
Transportation costs rose about 22%, according to the report, while inventory-carrying costs -- which measure the value of the goods a retailer has, against the cost to store them -- jumped nearly 26% over 2020.
The inventory costs reflect the long lead times for orders that companies have been using to get ahead of supply-chain disruptions as well as delivery delays that have left retailers and manufacturers holding goods out of step with demand.
Companies "have a lot of stuff sitting in places that are different than where they want it to be," said Steve Bobb, chief marketing officer at BNSF Railway Co.
The report puts a detailed financial frame around the broad upheaval in supply chains triggered by the Covid-19 pandemic. Abrupt lockdowns that began in early 2020 decimated production and led to significant changes in consumer buying patterns, as well as product shortages that experts say continue to roil supply-chain planning and raise logistics costs.
"We expect the increases in costs to ease somewhat this year, but they will ease from these very high levels of the past year," said Balika Sonthalia, a partner in the strategic operations practice at management consulting firm Kearney and an author of the report.
The consumer spending that drives logistics decisions has pivoted again in recent months as people have started spending more on things like fuel, travel and work apparel, at the expense of categories like loungewear, furniture and home improvement.
Paul Bingham, director of transportation consulting at S&P Global Market Intelligence, said the data analytics firm is projecting a 4.2% increase in consumer spending this year. "But the composition of that is changing, " he said. "The durables category is facing headwinds."
Target Corp. said earlier this month it will cancel orders with vendors and offer discounts to customers to clear out an excess of inventory. Other big retailers, including Gap Inc., Kohl's Corp. and Macy's Inc., have also reported they have too many of the wrong items on hand.
Jennifer Kobus, vice president of transportation and logistics at cosmetics retailer Ulta Beauty, said the strains in supply chains have made it more important to work closely with logistics providers and the company's suppliers to ensure goods are on track.
"Planning is critical. We've had multiple contingency plans for the past few years" for the peak fall shipping season, she said. "This year, that's what we are going to be doing."
Bob Biesterfeld, president and chief executive of freight broker C.H. Robinson Worldwide Inc., said there have been supply-chain delays for some 18 months now. He said the company was unloading Halloween costumes at its warehouses at the ports of Los Angeles and Long Beach in December.
"It's inventory, but it's clearly not the right inventory," Mr. Biesterfeld said.
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