Murphy Presentation W Dollars Finnish Logistics Conf 2009 Rx2

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Strategic Trends Impacting

Logistics in the United States

Logistics Seminar 2009The Finnish Association of Purchasing and Logistics (LOGY)

Establish United Logistics GroupFebruary 5, 2009; Helsinki, Finland

--------------

Richard Murphy Jr.President & CEO

Murphy Companies&

Immediate Past ChairCouncil of Supply Chain Management Professionals (CSCMP)

Perspective….U.S. Logistics System Cost

2003-2006: Truck Driver Shortage

Impacts

2006-2008: Fuel Price Increase and

Rail Capacity Impacts

Logistics Cost as % of GDPSource: CSCMP State of Logistics 2008

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

NOTE: Steady Rise Since 2003!

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

10.1% of GDP

15%

Increase

2

U.S. Logistics System Cost

Carrying Costs

Interest 103

Taxes, Obsolescence,

& Deprec., Insurance 273

Warehousing 111

487

Transportation

Motor Carriers

Truck - Intercity 455

Truck - Local 216

671

Other Carriers

Railroads 58

Water 38

Oil Pipeline 10

Air 41

Forwarders 30

177

Shipper Related Costs 8

Logistics Administration 54

62

Total Logistics Cost 1397

$ Billions

(CSCMP 2008)

7.95% of TotalU.S Logistics Costs.Up 9.9% from 2006.

10.1% of GDP.Up 7% from 2006.

48% of TotalU.S Logistics Costs.Up 5.9% from 2006.

U.S. Logistics System Cost (in €)

Carrying Costs

Interest 78


& Deprec., Insurance 206

Warehousing 84

368

Transportation

Motor Carriers

Truck - Intercity 344

Truck - Local 163

507

Other Carriers

Railroads 44

Water 29

Oil Pipeline 7

Air 31

Forwarders 23

134

Shipper Related Costs 6

Logistics Administration 18

24

Total Logistics Cost 1033

€ Billions

(CSCMP 2008)

7.95% of TotalU.S Logistics Costs.Up 9.9% from 2006.

10.1% of GDP.Up 7% from 2006.

48% of TotalU.S Logistics Costs.Up 5.9% from 2006.

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▪ Why Discuss Warehousing….

• $111B is the cost of warehousing in U.S. (CSCMP)

Equates to $370.00 per person in the USA!!!

U.S. Logistics System Cost

Carrying Costs

Interest 103 343$


& Deprec., Insurance 273 910$

Warehousing 111 370$

487 1,623$

Transportation

Motor Carriers

Truck - Intercity 455 1,517$

Truck - Local 216 720$

671 2,237$

Other Carriers

Railroads 58 193$

Water 38 127$

Oil Pipeline 10 33$

Air 41 137$

Forwarders 30 100$

177 590$

Shipper Related Costs 8 27$

Logistics Administration 24 80$

32 107$

Total Logistics Cost 1367 4,557$

$ Billions $ per U.S. Person

(CSCMP 2008)

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U.S. Logistics System Cost (in €)

Carrying Costs

Interest 78 260$


& Deprec., Insurance 206 687$

Warehousing 84 280$

368 1,227$

Transportation

Motor Carriers

Truck - Intercity 344 1,147$

Truck - Local 163 543$

507 1,690$

Other Carriers

Railroads 44 147$

Water 29 97$

Oil Pipeline 7 23$

Air 31 103$

Forwarders 23 77$

134 447$

Shipper Related Costs 6 20$

Logistics Administration 18 60$

24 80$

Total Logistics Cost 1033 3,443$

€ Billions € per U.S. Person

(CSCMP 2008)

Perspective….U.S. Trucking

• 2.9M Class 8 Tractors in U.S.

• 5.3M Trailers in U.S.

(ATA, most current data is 2006 survey)

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▪ Perspective….Warehousing

• 5 Billion Sq.Ft of warehousing in U.S. (ProLogis)

▪ Why Discuss Warehousing….

• 5 Billion Sq.Ft of warehousing in U.S. (ProLogis)

Creates a 4.1 feet by 4.1 feet square of space in awarehouse for every man, women and child in theU.S…..all 300,000,000 of us…!!!

4.1 Feet

4.1 Feet

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▪ Why Discuss Warehousing….• 5 Billion Sq.Ft of warehousing in U.S. (ProLogis)

Floor area equals a 4 foot walkway from hereto the Moon…!!!

U.S. Economy…..….During Current Recession

All transportation modesdropping capacity FAST…!!!

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Trucking Industry…..

Cumulative decrease in loads fromJune 2008 to December 2008


….Capacity Reductions….

Carrier bankruptcies growing

Source: Wall Street Journal 12/11/2008

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Trucking Industry…..….Capacity Reductions….

Equipment Sell-off - Trucking companies sell-off

of tractor equipment overseas growing


Lane Selection - Trucking companies have become very

selective in what lanes they will accept freight to reduce“deadhead” miles driven and keep equipment moving.

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Truck driver shortage - still a major factor;

current recession merely a lull in the storm

Driver Turnover


….CapacityReductions….

Truck driver shortage – Today’s

drivers older then average workerand retiring fast…!!! New driversmust be age 25 by insurance reg’s.

Rail industry hassame issue of enginedriver retirements &shortage

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Rail Industry….….Trucking is not Alone….

Container &Rail Car TrafficDown….

….But Investmentin InfrastructureUp…

UP Railroad

BNSF Railroad

• Represents 25% of total warehouse space in U.S.

• Represents 25-33% of total warehouse cost in U.S.

• Grew 8-12% / year consistently for past 10 years.

• Expect 6-8% / year growth over next three years.

• The industry is not significantly feeling the

effects of the current slow economy…!!!

• $37.5 Billion - gross revenue of 3PL’s / Logistics Co’s warehouse / distribution only sector.(Armstrong 2008)

• 8000 for-hire public / contract warehouse buildings in US. (Armstrong 2008)

• 900 for-hire public / contract warehouse companies. (Armstrong 2008)

Outsourced Warehouse / 3PLIndustry….

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More Warehouses (vs. Fewer)…???• Last 10-15 yrs trend has been fewer and bigger warehouses. 3-5 Total.

• TQM, ERP, JIT / Lean Manufacturing & lower fuel cost driven!

Existing

Trends Influencing U.S. Logistics

More Warehouses (vs. Fewer)…???

• Growing impact of “big-box” retailers

• Less backroom stock space.

• Pushing inventory up-stream to suppliers.

• Reducing the cash flow tie-up a key factor.

• Demanding frequent replenishment and

smaller orders.


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4

Source: U.S. Department of Commerce, Census Bureau

Source:US Dept ofCommerce,Bureau ofEconomicAnalysis &CSCMP Stateof Logistics2007.


What’s Happened to the Order Profile…???

“Old 80:20 Rule”


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North America “Mega-Regions”– Network analysis further impacted by these growing regions


Rotman School of Management,University of Toronto

Continued Impact of Eastern U.S…..


Source: The Tioga Group

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Highway System....

….CongestionImpacts

2020

2035

Source: U.S. Department of Transportation, FederalHighway Administration, Office of FreightManagement and Operations, Freight AnalysisFramework.

Rail Rebirth….….Key Realities

• More Energy Efficient

• Lower Emissions

• Lower Cost

• Longer Timelines

• At Max Capacity

• Intermodal Growth High

• Doesn’t Provide Local P&D


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Intermodal• Growing to offset rising diesel

prices and congested

seaports.

• “Intermodal is a core

growth opportunity for

the railroads…but they

must adapt to the

expectations of typical

truckload customers”Steve Weiby, VP, CH

Robinson.


COFC- “Container-on-Flat-Car”

TOFC- “Trailer-on-Flat-Car”or “Piggy-back”

• Intermodal• Running into “NIMBY”

• Community opposition and “not-in-my back-yard”

• Pushing transload yards out from city.

Chicago: 56 miles out

Dallas/Fort Worth: 42 miles out


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Rail Box Car Influences• 1 Box-car handles 3-4 truck loads!

• Since the 1970s most new warehouses have not beenbuilt with rail siding!

Select Public/Contract/3PL Warehouse Companies are nowone of the few places to get rail access.


Rail Transload Centers• Major Railroads establishing “Rail Transload

Partners” across the country with: Indoor warehouse unloading / loading

• Food and Paper Industry

Outdoor rail yards for unloading / loading

• Lumber / Forest Products Industry

• Murphy is a Rail Transload Partner and handlesover 10,000 rail cars / yr.

• Rails Served w Facilities: BNSF, CN, CP, UP & MNCommercial


Murphy’s NorthtownLogistics Campus

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Rail Influences• Growing Volume

• Rail congestion impact– Slower Trains

Railroad Average line-haul speed (mph)

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25.0

26.01

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mp

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Revenue ton-miles(billions)

300.0

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440.0

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Billio

ns

ofT

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s

Source: Bureau ofTransportation Statistics

Trends Influencing….U.S. Logistics

Trends Influencing….U.S. Logistics

Rail Congestion

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Urban Land Prices - Pushing Out Logistics Centers These are the sites typically found in the suburban industrial parks.

Minneapolis Costs:

1994: $1.00 - 1.25 / sq.ft.

2007: $4.50 – 6.00 / sq.ft.

…..500+ % increase in 10 years!

Impact –Pushing Logistics centersout further, thus increasingtransportation costs andcongestion.

Trend especially evident inChicago, New Jersey,California, Dallas.


Where To FindWarehousesToday…??? Growth of Large

Logistics Parks &Corridors

Regional EconomicDevelopment Drivers.

Big DC Campuses can’t beclose to big cities, but theyalso can’t be too far out…!!!

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Construction Costs….”SOARING…!!!”• Example: Construction costs in Minneapolis Market for new warehouses

…. 73+% Increase since 2000 (8 Years)..!!! Cost per square foot ( at 200,000 sq. ft. & larger):

$22 - $24 (2000)

$38 - $45 (2008)

• Current recession has lowered construction costs only slightly.

This pricing is not unique to Minneapolis.

Typical of entire U.S.


Fuel Prices….

($/Gallon)

Source: Department of EnergySource: Department of Energy


Diesel Prices: 1994-2008

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

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“No trucking capacity has been added

after the perfect storm of 2000.

The risk vs. return & return on invested capital is very poor….

….no more juice to squeeze out of the fruit.”WERC Conf 4/23/07

“The 2004/2005 capacity problem will pale in comparison

to the upcoming capacity crunch after the economy recovers!National Press Club, 6/18/2008

Jim O’NealPresidentO&S Trucking

Why are Jim’s statements important…???


Freight TransportationModal SharesIn Domestic Tonnage

69%

7%1% 0%

15% 10%

0%

70%

15%

9%7% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Truck Rail Pipeline Water RailIntermodal

Air

2005

2017

U.S. Commercial Freight Activity By %Sources: Cureau of Transportation Statistics

& U.S. Freight Transportation Forecast to…2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

Truck Rail Pipeline Water Multimodal Air

1993

1997

2002

2004

2016

Source: U.S. Freight Transportation Forecast to…2017

Trucking Capacity Issue Will PlagueTrucking Capacity Issue Will Plaguethe Economy for Years!the Economy for Years!

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Network Cost + Carbon Footprint Reduction….


Source: MIT 10-2008

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Network Cost + Carbon Footprint Reduction….


Source of last 3slides: MIT

Consolidation….….Old Concept – Renewed Interest

• Growing interest by “individual”shippers to:

• Consolidate multiple orders to a region.

• Wait till enough product ordered to shipfull loads.

• Utilize cross-dock operations to deliverlocally.

• Growing interest by “groups” ofshippers:

• Consolidate orders together to build fullloads for direct TL shipment or to across-dock facility.


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More Warehouses (vs. Fewer)..???

• Additional forces at work…. Fuel price impacts – order size, frequency of

replenishment, etc.

Growth of Lean Manufacturing and JIT plantsupport.

Consumer trend toward “wewant it now!.”

SKU Proliferation…


More Warehouses (vs. Fewer)…???• Trade-off of….

Higher inventory costs, lower carbonfootprint, more warehouse locations, etc.

vs.Rising transportation costs,

capacity constraints, security, etc.

The economics are shifting…!!!


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More Warehouses (vs. Fewer)…???Serious consideration being given to increasing number of warehouse points.

Where 3-5 network of warehouses was cost effective….. today many arelooking at becoming a 6-10 network of warehouses.

Existing

New DC

New Cross-Dock


U.S. Import Network

Global Supply Chains….Impacts on U.S.

Source: The Tioga Group

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Implications of offshore sourcing/ manufacturing:

• Less manufacturing space needed in USA

• More DC / warehouse spaceneeded in USA

Distance adds time and moresafety stock requirements

Resulting in changingdistribution patterns in US.


Historic Domestic Oriented Networks….….vs. New Import Oriented Networks

Internal source of product flows evolved over past 20 years to today’simport focused product flows.

Large shippers like Wal-Mart are also beginning to affect warehouse locations in order tofeed their huge complexes.


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Import Transportation• Asia to USA (7000 miles by ocean):

$1800.00 - $0.26 / Mile

• LA Port to Chicago (1750 miles byintermodal): $2000.00 - $1.14 / Mile

Panama Canal• Land cost portion is pushing many to

consider ocean voyages through thePanama Canal for better access to eastcoast and gulf ports.

• In 2008 – 25% of U.S. imports flowedthrough the Panama Canal.

• 2014 - Panama Canal should be wideenough for largest ships.

Global Supply Chains….….Impacts on U.S.

• Growing congestion and new clean air

mandates for LA Ports are forcing many

to look at alternative ports and inland

routes: Prince Rupert in Canada

& Mexican Ports

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“NorthwestPassage”….

• People are starting to talk about

the feasibility in 10 years of the

“Northwest Passage” being

open for container ships.

• Caused by warm arctic watersmelting the ice.

• Will create a potentiallyshorter route to east coastand St. Laurence Seawayports.

“NorthwestPassage”….

…. + “NortheastPassage”for Europe?

Source: The Economist, Jan. 3, 2009 Issue,p7 of Special Report on the Sea.

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Port Congestion and High Fuel Price Impacts….

….Creation of Inland Ports

Rail / truck / ocean….….integration hubs

Examples include:• Chicago

• Cincinnati

• DFW / Texas

• Kansas City

• Memphis

• Atlanta

Locations: Up to 100 miles fromocean ports with services generallyprovided by 3PL’s.

• Resulting from:• land shortages near seaports

• Transportation efficiencies delivered bymaturing intermodal and rail industries.

• Activities include transloading,repack and labeling.

• Example: 6 - 40’ containers = 4- 53’ trailers


Port Congestion and High Fuel Price Impacts….

– ….Creation of Import Warehouses

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Import Containers….“Maersk Effect”• No longer want their containers inland.

• Pricing reflects penalty for not transloading near port

• 1st ocean carrier to implement these rules.

• Others analyzing due to box and handling costs – will lead to growth intransload service industry.


“Short-Sea” Shipping - To handle increasing port and highway

congestion “Short-Sea” Shipping is growing along the east coast and gulf -practice is common in other parts of the world.

Port of Hong Kong Example – Note localbarge and unloading of regional ship forfurther distribution.


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“Short-Sea” Shipping….


73% experienced Logistics disruptions past 5 years 94% of these reported impacts affected profitability & customer expectations.

(Accenture)

Control Tower Visibility….the need is growing…!!!

Global supply chains are long & complex!

Change from “Push” to “Demand” driven models.

“Time intolerance” growing in supply chain strategies and

consumer expectations.


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Imports….

Impacts of

Fuel Cost


Source: WSJ, 6-13-2008, page A1

Can long supply chains still be cost effective?

”Near Sourcing”….

• Factors influencing re-evaluationof offshore manufacturing: Energy costs – esp. in logistics /

transportation

Complexity of supply chains andvisibility issue

Long lead times

Excess inventory required

Larger carbon footprints – “Green”movement impact

Product Quality Controls

Available labor pools in selectcountries

Impact in China from growinginternal consumer market (vs.export market)


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Focus changing from labor cost per hour to….

….greater focus on total landed cost….


Network evaluation becoming more important….


Source: MIT 10-2008

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Network evaluation – Case Studies….


Network evaluation – Case Study….

Source: MIT 10-2008


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“Made in America…..Once Again”• DC Velocity Viewpoints web letter February 28 2008

Mitch MacDonald, Group Editorial Director.

• Corporations are abandoning their myopic focus onhourly wages.

• Looking to USA again because it offers:

Skilled labor force

Automated manufacturing technology

Strong transportation infrastructure

Proximity to world’s largest market

Political stability


Many investors see “green” practices as areflection of good management practices.

Wall Street Impact on Green

Green Trends Influencing U.S. Logistics

“Eco”• ….Eco-nomics

• ….Eco-logy

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Major corporations - “Green” Initiatives

• Warehouse / DC Performance Measure:

….100% Order Accuracy

Traditional Focus: ….Customer satisfaction.

Green Focus: …to avoid redelivery and thus

reduce carbon emissions.


Major corporations - “Green” Initiatives

• Warehouse / DC Performance Measure:

….Zero Customer Order Complaints

• Traditional Focus: …do whatever it takes to

make customer happy!...order minimums are noproblem…delivery ASAP!

• Green Focus: …increasing order minimums

to reduce delivery frequency, and longer orderlead times to facilitate transportationconsolidation.


36

Energy Creation Measures

• Wind power units – rooftop units (individual fans or

horizontal row of blades at roof edge to capture air flow rising upand over building, & stand alone tower units.


Solar Power StationsLarge available flat areas - “just sit there” - Solar panels not a great load factor

• Commercial solutions include:

“Solar Energy Service Provider” who provides 100% responsibility todesign, build, own and operate the asset - including all upfront purchase andinstallation costs.

…..to solutions where building owner owns the solar assets.

Whole Foods Store, CA

Staples Store

Green Trends Influencing….….U.S. Logistics

2 SolarProviders:

37

Need to keep in mind theinland waterways as atransportation option.

Trends Influencing….….U.S. Logistics

Economic Comparison….


38

▪ Implications….• CEO / CFO’s - discovered the power of Supply Chain

Management.

• Wall Street• Watching industry dynamics

• Logistics industry represents 10.1% of the economy, and growingdue to fuel prices.

• Supply Chain Managers – still searching for balance ofefficiency & customer service.

• Visibility – growing need as Supply Chains have become morecomplex and long. Transportation / Logistics providers will have to meetrequirements.

• Mode Integration Growing – more and more interfacebetween ocean / rail / truck / river modes.


▪ Implications….• Fuel Prices

• Will remain higher than tradition.

• Forcing changes to Supply Chain Networks – domestically andglobally.

• Supply Chain Network Design• Growing interest in more DC and Crossdock locations.

• Likely to see 6-10 DC/Warehouse networks (vs. 3-5 which wascommon since the late 1980’s).

• Trucks Will Remain a Major Player• Trucks are expected to continue to handle 60-70% of all freight.

• Most freight involving rail / ocean / river is handled by trucks atbeginning & end of movements.

• Railroads are making a comeback – and will play agreater role in the future.


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▪ Implications….• Global Supply Chains

• More cargo will arrive at gulf & east coast ports

• Growth of “Inland Ports” and “Import Warehouses”

• These two trends are creating large Logistics Centers in keyinland markets.

• “Made in America” is receiving serious consideration again.

• Green Logistics is in…!!!• “Green” seen as a reflection of good management.

• Could lead to less service & options for shippers.

• Will likely lead to a “slow-down of logistics velocity.”

• “Consolidation / Pool Distribution” will likely come back in popularityamongst shippers.


Strategic Trends Impacting

Logistics in the United States

Logistics Seminar 2009The Finnish Association of Purchasing and Logistics (LOGY)

Establish United Logistics GroupFebruary 5, 2009; Helsinki, Finland

--------------

Richard Murphy Jr.President & CEO

Murphy Companies&

Immediate Past ChairCouncil of Supply Chain Management Professionals (CSCMP)

Business

Murphy Presentation W Dollars Finnish Logistics Conf 2009 Rx2