Even the best managers often ignore the logistics costs buried in their product. Across our economy, logistics – the cost of moving and storing goods – accounted for 7.7 percent of gross domestic product in 2009. That’s a lot of money. For many companies, especially those that buy and sell globally, those costs can add up to 20 percent of their cost of goods.
During the recession, these costs dropped as fuel, interest rates, inventories, and other operating costs have fallen. During the five years ending in 2007, logistics costs ran between 8.6 and 9.9 percent. As the economy strengthens you should anticipate a return to these levels and actively seek opportunities to lower your internal costs. And don’t forget that the landed price includes the cost of delivery, which is often paid by your customer.
About two-thirds of total logistics cost is transportation. Let’s take a look at where transport costs may go in 2011.
Fuel: A barrel of crude oil in mid-February was nearly $86, up from $74 a year ago. As a result, diesel has jumped 40 percent and gas has risen 28 percent. Given the stronger global economy and the turmoil in the Middle East, you should anticipate higher fuel costs this year. Note that crude has already reached and passed the average price predicted by the U.S. Energy Information Administration for 2011.
Trucking: Prices for truck freight are not only sensitive to fuel costs but also the supply-demand balance in industry capacity. In 2008-09, truckers underwent a massive downsizing as industry revenues shrank by a quarter and improved only slightly last year. With that capacity shrinkage combined with improved volume, pricing power is returning to the freight carriers, especially in the LTL sector. In the past twelve months two general rate increases have taken effect. Capacity may take another hit as pending federal regulations reduce driver hours of service. The Feds are considering lowering daily driving time from eleven hours to ten and daily on-duty time from 14 to 13 hours.
Initiatives like the Clean Truck Program at the Port of Long Beach are also raising equipment costs. That California port bans the use of trucks with 2003 and older engines and by 2012 will require all trucks to meet 2007 emission standards. Ultimately, capacity and rates will respond to equipment additions if profitability recovers. At the end of the day, to achieve the lowest rates your traffic manager will be forced to do more than simply bid out your freight.
Rail: Experts are predicting a three to four percent jump in rail rates. Factors affecting rates in this sector include the cost of implementing positive train control by 2015 as mandated by federal law. This initiative is aimed at increasing operating safety and, improving fuel efficiency but will cost an estimated $10 billion, an amount beyond the financial capacities of the rail industry.
Ocean: For those companies importing materials and finished products, container rates over the past 15 months have been on a roller coaster ride. Since the winter of 2010 rates for a forty-foot container (FEU) moving from China to the U.S. east coast went from $2,700 to $4,800 last summer and back to $3,700 by the start of 2011. As it has happens in the trucking sector, rates always respond to the supply-demand balance. Looking to maximize profitability through higher rates, vessel operators take every chance to flex their capacity. During the first half of 2010, carriers pushed through rate hikes while idling substantial ship capacity after the recession’s decline in global trade. In addition, a worldwide container shortage further tightened capacity. Add the early 2010 surge in trade as businesses reacted to the economic turnaround, and a scramble for space on ships ensued among container customers. The environment for hiking rates couldn’t have been better.
Seeing an opportunity to reverse the financial losses incurred during the recession, the carriers added capacity. Space on the key routes from the Far East to Europe and North America jumped nearly 20 percent over early last year. In their game of back-and-forth, vessel operators are now slow steaming to lower capacity and save on fuel costs. This strategy has effectively reduced capacity by four percent, and the carriers are now suggesting an increase of $400 this spring on 40-footers moving from the Far East to the U.S. west coast plus a $400 surcharge for the June-November peak season.
Many analysts, who see global trade growing by only seven percent this year compared to 11 percent in 2010, believe conditions don’t sustain such increases. Others, predicting stronger business, argue that the planned rate hikes will stick. As always, the only certainty for container users is the need to be diligent.
Reduce your costs
So what can you do to reduce or contain your transport costs?
Consider outsourcing. Third-party logistics specialists can assist you in building a low-cost transportation/storage strategy that can respond quickly to changing inbound/ outbound demands while minimizing your need for adding skilled staff and investing in facilities.
Involve your carriers. In the near term you will not find many savings in rates alone. Collaborating with your transportation providers to identify and exploit external opportunities is a must.
Analyze your supply chain. Look for possible economies of scale from a reduction in the number of your suppliers and transport providers.
Work with your customers. With your customers often paying the freight to their dock, an absolute must is strategizing with them to implement least-cost solutions, such as consolidating three shipments into two.
Explore “co-opetition.” Partnering with competitors can produce savings in rates for storing and moving materials and products. For example, larger volume gives you added clout when negotiating container contracts.
Bottom Line: Worldwide economic development and the recovery of the U.S. economy are bringing opportunities for even the smallest companies to expand their market reach. Capturing those prospective customers will depend heavily on the cost of landing your products at their dock. With logistics costs certain to rise in the near term, you best concentrate on optimizing the price tag for moving and storing your goods. Labor and materials are not your only costs.
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