1.5 Logistics and the Economy

In terms of trade and economic development, logistics makes the world go round. At 8% of gross domestic product (GDP), the United States has one of the most efficient, lowest-cost logistics systems in the world. Why should you care? As Figure 1.5 shows, 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 U.S., logistics costs have been around 8% of GDP Gross Domestic Product (GDP) in recent years, equal to $1.56 trillion dollars in 2020 (see Figure 1.6).1 By contrast, in China, logistics costs average almost 15% of GDP, nearly twice as high as in the U.S. More efficient logistics in the U.S. help offset China's labor cost advantage.

The numbers show that logistics is a huge industry—and both an economic driver and a creator of jobs. Table 1.1 breaks down total logistics costs by value-added activity for the United States. In 2015, this classification was updated to include parcel carriers, recognizing the growing influence of e-commerce on logistics costs. For the U.S., motor carrier transportation is the biggest single expense category. Almost every freight item in the US is on a truck for at least some part of its journey. These costs vary from country to country, with emerging markets spending relatively more on inventory due to their less efficient transportation and road systems. Poor Infrastructure 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 U.S. companies started implementing lean practices, logistics costs as a percentage of GDP were 16.2%. At that time, inventory carrying costs 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.

• Today: Over the past few years, logistics costs have remained in the mid 7% range until surging by 11.4% in 2018 because of rising prices as a result of robust economic growth and strong demand for logistics services. We can expect volatility in the numbers for 2021 and 2022 as COVID-caused supply chain snarls work through the global economy.

  Although transportation costs were up slightly in 2020, overall logistics costs actually dropped by 4%. "Why," you ask? Inventory carrying costs declined by 15% and other administrative costs also dropped by 4.9%. This reality highlights the need to look at the entire logistics system. As the economy surges post COVID, logstics costs are likely to increase.

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!