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As Fuel Prices Rise, Here's How Supply Chains Can Cut Transportation Costs

Posted by Marc John Villestar | June 11, 2018


Think about the supply chain of virtually every consumer good. If it travelled from a supplier, to a distributor, to a retailer, then most likely its cost is directly linked to the cost of the fuel that helped it make that journey. 

Transportation can be a significant part of a business’ logistics costs—potentially upwards of 55 percent. And that share is only growing as fuel costs rise. 

Fuel price is driven primarily by five factors: demand, refinery maintenance costs, transportation constraints, crude oil prices, and geopolitical disruptions. Due to a combination of these factors, oil and fuel prices are expected to face upward pressure for the remainder of 2018. Logistics companies are certainly no stranger to the volatile nature of their profession—let’s take a look at some strategies they’ve developed for buffering rising fuel costs.



Nearshoring

In an attempt to reduce the length of transportation for products in the supply chain, several industries have taken to nearshoring. Sourcing products and raw materials from locations that are near the end-market helps reduce transportation costs. This go-to-market strategy makes manufacturing far more cost efficient. A study by supply chain consultancy group Miebach revealed that 51 percent of companies already use nearshoring as a location strategy for their production. Around a 26 percent increase is expected for this trend, significantly in Europe, while onshoring will increase in North America. Asia, however, is morphing itself from an offshore haven to an attractive nearshore location due to its growing demographic of middle class consumers.



Shipability

Marketability isn’t the only thing companies need to take into consideration when planning their supply chain. Shipability measures the efficiency with which products are prepared to be transported. It includes customized packaging, product protection throughout transit, offloading, reloading, and repackaging. Optimizing packaging plays a huge role in shipability: reducing package size and weight, incorporating lighter-weight materials, eliminating unnecessary packaging layers, etc. Keeping all this in mind can help companies enhance revenue by saving on shelf space and freight cost.



Lean Transportation Policies

Shippers pay attention to what they call shipment consolidation, examining their own shipping patterns to find opportunities to consolidate shipments,  potential leverage to be gained from using a third-party logistics provider (3PL), and optimizing better vehicle utilization.



Reducing Cost By Reducing Carriers

Fewer carriers equals more volume equals discounted cost. For more volume, carriers can offer lower overall rates across all routes. Single sourcing is the practice of consolidating all supply chain needs (as much as possible) to one shipping or logistics company. It’s another way for companies to get discounted packages for transportation services.



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