| The Impact of High Fuel Prices on the Logistics Industry |
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Increasing fuel prices have inspired – perhaps compelled – many companies to restructure their operations in order to diminish erosion of their profit margins.
Inventory costs are being pushed closer to the final destination. For years, logistics executives have focused on minimizing inventory costs by moving goods through the supply chain as quickly as possible.
Now rising fuel costs are making some companies think about keeping more inventory on hand, but not all are ready to take that step. Larger loads are being shipped and buffer stocks increased.
Load integration and multi-modality are key issues.
Companies are using more fuel efficient modes such as rail and water which allows them to ship larger loads and reduce congestion.
Short sea shipping and moving freight along coasts and inland waterways is proving to be a very strong alternative for the logistics industry.
Consequences of higher fuel prices
• Inventory costs pushed closer to final destination
• Increased buffer stocks, larger loads shipped
• Development of more flexible manufacturing strategy
• Near-shoring to reduce inventory
• Increased product density
• Development of central warehouses
• Postponement of product finalization
• In-sourcing drives changes in warehousing and distribution
• Locating production at customer plant sites
• Exchange of commodity products with competitors to reduce the need for transportation
Companies have developed more flexible manufacturing strategies to help alleviate the impact of higher fuel costs.
Near shoring is helping logistics executives to reduce inventory, optimize inventory and avoid congestion. Companies are looking for the next low-cost countries which
close in distance will allow them to boost their profits by avoiding the fuel price dilemma. Of course, the geographic, cultural, labor, economic and political variables have become key for making supply chains more flexible.
There is a difference of opinion on whether to centralize warehousing and distribution activities – which reduces capital costs, or to increase the number of regional facilities in order to reduce warehouse-to-market transportation costs.
Companies evaluate alternative transport options when lead-time is not an issue, i.e. road / rail / sea / multi-modal transportation instead of airfreight, while others have expanded their use of 3PLs / 4PLs, particularly those with shared-user facilities and vehicle fleets.
Other actions taken include route optimization and improved fleet utilization; reduced delivery frequencies; continuous redesign of logistics / supply chain / distribution networks; reduction of production capacities; delaying of projects; and
increased local sourcing.
Record high fuel costs have already driven many companies out of business.
Counteracting volatile oil prices
Which logistics functions are key to counterbalancing oil price volatility in the logistics industry? Almost all the companies consider it as being the “transport” and more than half consider it as being “fleet management”.
Volatile oil prices can be counterbalanced by effective use of information systems. Others believe the solution lies in automation and standardization of processes, and local – or at least regional – sourcing.
Strategic options
Strategic options to counterbalance fuel price increases
• Optimizing routing and supply chain management with new technologies
• Swapping transportation modes that can be more fuel efficient (rail, for example)
• Developing long-term fuel pricing strategies
• Leveraging tactical methods to reduce costs
• Developing alternate energy options
• Developing alternative ports and hubs
• Selecting alternative service providers
Writing unpredictable fuel costs into contracts
Some companies negotiate rate/fee changes with customers while others pass costs directly to the customers. The majority include escalation and “variable fuel surcharge” clauses in their contracts to enable them to increase rates and/or surcharges to cover fuel price hikes.
Capitalizing on fuel surcharges
Some carriers are capitalizing on the fuel surcharge news to impose unjustified fuel surcharges to boost profits. Many shippers have complete quarterly review of transportation, warehousing and logistics related costs to identify collaboration spot in order to change processes to reduce
costs. 3PLs and 3PL customers increasingly use standardization fuel surcharges tables. Fuel indexing, peak season surcharges, capacity incentives, and other variables are taken into account at the moment of negotiating fuel surcharges.
Conclusions
It seems that the industry is heading towards a new distribution paradigm. Shippers and 3PLs are moving from warehouse and distribution center consolidation to an increase in the number of DCs.
Inventory is key in the design and operation of a supply chain. Rising fuel costs are making some companies think about keeping more inventory on hand, but not all are ready to take that step. Carriers, 3PLs and shippers are deploying the latest technologies to optimize their networks in times of soaring fuel prices. They are also increasing their buffer stocks and shipping larger loads. All the parties are aiming at increasing product density all along the supply chain.
A new trend in the logistics industry is short sea shipping. Moving freight along coasts and inland waterways is helping 3Pls, shippers and carriers cutting fuel costs and improving their green credentials. A logical consequence of this is the
flexibilization of the manufacturing process. Companies are looking for low costs countries closer to home.
Logistics seems to be changing and with it, manufacturing. How to optimize the logistics networks is the most direct way to counterbalance high fuel price volatility.
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Articol disponibil in limbile: RO, EN
Data adaugarii: 3 Sep 2008
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