In recent years the trucking industry has been faced with a double-edged sword — rising fuel costs and a plummeting labor force. In today’s blog we’re taking a look at what this means for shipping costs, and how retailers can fortify their operations against price hikes.
Why are shipping costs growing?
Fuel accounts for about 21 percent of carrier expenses. Diesel prices recently reached $3.28 per gallon — a three-year high — and could climb as high as $3.50 by the end of 2018.
But the largest source of cost increases for most companies have been driver wages and benefits. Currently, there are more than 500,000 over-the-road drivers delivering goods across the U.S. But most analysts say this figure is at least 45,000 short of where it should be. Since the early 2000’s fleets have been struggling with an ongoing lack of qualified drivers. Many employees are leaving the industry to take jobs that allow them more time with their families. Fewer young workers are entering the trucking industry, leaving companies with an aging workforce that is retiring rapidly. To stay competitive in a market beset by growing demand and shrinking talent, many firms are increasing wages and going all-out to attract new hires.
Response of shipping companies
As diesel prices tick up and the costs of keeping drivers rises, freight companies are taking action to protect their earnings. Shipping costs hit an all-time high earlier this year. Companies like XPO Logistics and Old Dominion Freight have implemented a general rate increase of 5.9 percent and 4.9 percent respectively. Logistics providers also investing in new equipment. A total of 37,500 big rigs, the most in over half a decade, has been ordered by the U.S. trucking industry. However, trucking fleets are still having challenges adding capacity fast enough to respond to the flood of new business. The problem is so severe that last month, a group of American shipping companies petitioned Congress to allow larger capacity trucks on the roads, to help companies meet demand surges and save on operating costs. Many, however, are concerned that these larger vehicles would pose safety hazards to other drivers.
Implications for other industries
Demand for consumer goods continues to experience aggregate growth, and with it industrial output. Last year U.S. manufacturing experienced its highest quarterly growth since 2010. Manufacturers of everything from clothing and food to construction equipment are shipping more cargo than usual. As higher labor and fuel costs ripple through the economy, the pressure is mounting on manufacturers and retailers to raise costs — costs that could eventually be passed on to consumers.
Tips for weathering the impact of shipping costs
Retailers can take steps to minimize the inefficient use of logistics resources — namely, by driving better visibility and communication throughout their operations. By being aware of how prepared they are to meet demand for specific products, and identifying patterns in demand, companies can potentially reduce orders or consolidate them into less frequent shipments. Shipment parameters should be utilized to their fullest extent to offset higher costs. For example, consolidating larger shipments in FCL (Full Container Loads) should be a best practice. On the other hand, products that experience more volatile demand should be planned for accordingly — rather than ordering them in bulk shipments, parcel them into LCLs (Less Than a Container Loads) for smaller and more frequent delivery that’s cost-effective. To optimize inventory and storage, identify and eliminate open spaces to make use of available floor-space and increase storage density.
Saving money and delivering customer satisfaction in the face of externalities — in this case, rising shipping costs — depends on good planning. And as always, good planning depends on communicating and responding to needs across your supply chain, with speed and precision. Consolidating shipments and taking advantage of space will be great strategies as costs increase, but to be truly effective, they should be underpinned by these essentials.