The unheralded key to the New Economy.

The unheralded key to the New Economy.

The unheralded key to the New Economy.

Moneybox
Commentary about business and finance.
Jan. 20 2006 4:57 PM

One Word: Logistics

The unheralded key to the New Economy.

In a classic scene from The Graduate,Mr. McGuire (Walter Brooke), buttonholes young Benjamin Braddock (Dustin Hoffman) and dispenses some career advice:

Mr. McGuire: I just want to say one word to you—just one word.
Ben: Yes sir.
Mr. McGuire: Are you listening?
Ben: Yes I am.
Mr. McGuire: Plastics.
Ben: Exactly how do you mean?
Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it?
Ben: Yes I will.
Mr. McGuire: Shh! Enough said. That's a deal.

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To Dustin Hoffman's character, plastics represented everything awful about the future into which he was unwillingly thrust: a soulless, boring, and unsexy industry; one no 21-year-old college graduate would willingly go into. And yet plastics was simultaneously a ubiquitous material that helped define the age and a hugely important economic force. In the 1960s, as it is today, plastics was a huge manufacturing industry that created jobs at every level—executive, middle management, labor—all over the world.

I haven't seen the new Jennifer Aniston vehicle Rumor Has It,whose plot is based on one of the central conceits of The Graduate, but if there were a similar scene, Mr. McGuire wouldn't be talking about plastics. He'd be talking about another seemingly soulless, boring, and unsexy industry: logistics.

The work of moving stuff through supply chains is the ultimate behind-the-scenes, unglamorous corporate function. (Quick: Name a famous logistician!) The prospect of spending your life helping to move cargo, commodities, people, packages, finished goods, raw materials, liquids and solids, grains and fruit, pig iron, and coal from one part of the globe to another may not appeal to many hotshot undergraduates. And yet, as plastics did a generation ago, logistics helps define our age and is a hugely important economic force. In fact, it's the unheralded key to the New Economy. As a result, logistics is smokin' hot.

Why?

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1. Exploding global trade. The movement of goods and services around the world is expanding rapidly thanks to a series of factors: outsourcing, the rise of manufacturing in new centers (China), the rise of new producers of raw materials and commodities (Brazil and Russia), the rise of new consumers (India), and greater economic integration among trading blocs in Europe, North America, and South America. As the International Monetary Fund reports (click here and see Table 20 on Page 233), the volume of global trade in goods and services has risen at a projected annual rate of 6.6 percent over the years 1997-2006. For goods alone, the growth rate is higher, and it has been particularly robust in recent years: 10.9 percent in 2004 and an estimated 7 percent and 7.6 percent in 2005 and 2006, respectively.

2. The spread of just-in-time inventory management. Manufacturers have long realized that carrying a larger inventory of parts or components than they absolutely need is a waste of time, space, and resources—and it ties up cash that could otherwise be earning interest. But in recent years, this mentality has increasingly spread from car manufacturers to service companies: retailers of all stripes, hospitals, grocery stores. All of which means businesses today increasingly rely on systems, companies, and people who make sure that precise amounts of materials get to where they need to be at precisely the right time. In industries where margins are thin and competition is intense, the ability to handle logistics effectively is a huge competitive advantage. For titans like Wal-Mart and Dell, logistics isn't just a necessary back-office function, it's the heart of the business and the root of their competitive advantage.

3. The e-tailing revolution. Every online retailer, by definition, possesses national (if not international) reach. So, they rely on their own logistics systems—and those of delivery companies like FedEx, UPS, and DHL. In the most recent Christmas season, Amazon.com took orders for 108 million items, including 3.6 million items ordered Dec. 12. On the peak day, the company shipped 2.7 million units to more than 200 countries. These figures were up sharply from last year, when the largest one-day order total was 2.8 million units and the largest one-day shipping total was "over two million units." How does Amazon manage to delight so many customers? Logistics.

As a result of these megatrends, the demand for the infrastructure—the physical and intellectual capital that can manage logistics—is growing. There's a shortage of truck drivers in the United States, for example. And while airlines servicing consumers have generally eaten higher gasoline costs, logistics companies have shown that they can successfully pass higher costs on to their customers. Railroad Union Pacific reported a good quarter because it was able to pass along higher fuel costs as it handled record freight volumes. The same holds for FedEx, which, as this chart shows, has outpaced the S&P 500 over the last three years.

Meanwhile, the market for logistics-related mergers and acquisitions is heating up. Last November, Brink's agreed to sell BAX Global, its logistics unit, to German railroad Deutsche Bahn for $1.1 billion. Last December, Deutsche Post, the German postal company that bought DHL in phases in 2001 and 2002, completed its $7.3 billion acquisition of British logistics firm Exel. P & O Group, a United Kingdom-based firm that operates container ports, accepted a $5.75 billion takeover offer from DP World, based in Dubai, in November. Now Singapore's PSA International, the world's third-largest container-port operator, is jumping in.

The good news for logistics is that the megatrends driving the growth show no sign of dampening. If anything, in fact, they're accelerating. The bad news is that, despite the growth, it is doubtful kids will be reading Logistics Management the way young go-getters read the Financial Times in the 1980s or Wired in the 1990s. At the end of the day, it's still an inherently less sexy—and less New York- and San Francisco-centric—industry than Wall Street or venture capital. Still, if you're young and directionless, and if the job market and macroeconomic climate make you think it's a terrible time to be young, I want to say one word to you, just one word: logistics.