The real impact of high transportation costs

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transport.jpgA great deal of South Africa’s supply chains rely on long-distance freight, whether road or rail (the imbalance between the two and cost implications of each is a debate for another time). With transportation costs featuring so prominently in the country’s supply chains and oil prices possibly on the rise, it is worth examining how high transportation costs, globally, are driving three main shifts in supply chain strategies.


These changes are having a beneficial effect, not just on transportation budgets, but also on broader supply chain and financial performance.

 

During the 1990s and the first part of the 21st century, the high availability and low cost of transportation services relative to the cost of holding inventory encouraged organisations to emphasise fast, frequent delivery to customers through such means as just-in-time delivery. But things have changed dramatically and organisations are increasingly calling such long-standing strategies into question.


The ‘game changers’ are volatile, escalating oil prices and an imbalance of supply and demand for freight transport services. These realities have led to high transportation costs—high enough to cause organisations to make transport-driven shifts in their supply chain strategies.


Three such shifts are having a notable impact today.


Shift 1: From ‘offshoring’ to ‘nearshoring’ sourcing strategies to reduce the number of miles travelled


Supply chain impact: With supply sources moving closer to end consumers, the international transportation component of a supply chain is shortened, and distance-driven costs are reduced.


Financial impact: Sourcing strategies that focus on nearshoring in an attempt to reduce the length of the transportation pipeline, are positively affecting freight costs, revenue and current assets pertinent to inventory. Freight costs are reduced because nearshoring means fewer kilometres miles travelled, and thus lower distance-driven transportation costs and less fossil fuel burned.
Revenue is improved because nearshoring means being closer and more responsive to the market, allowing organisations to make adjustments to order fulfilment with shorter lead times than if they were sourcing from Asia.


Shift 2: From product and package designs for marketability and production toward designs that also incorporate ‘shipability’ considerations


Supply chain impact: This don't-ship-air-don't-ship-water approach to package and product design helps to reduce shipping weight, size and materials while maintaining the products' appeal and convenience for consumers. These changes translate into savings in freight costs, packaging costs and space utilisation.


Financial impact: Freight costs are reduced because the reduction in package size and weight, as well as the use of fewer packing materials, allows more goods to be shipped in one truck, container or other conveyance. Moreover, a larger number of smaller-sized containers can fit within a manufacturer's allotted retail shelf space. Thus, revenue is enhanced through better utilisation of valuable shelf space.


Shift 3: From lean inventory strategies to lean inventory-transport hybrid strategies


Supply chain impact: These shifts toward shipment consolidation reflect lean inventory/transportation hybrid strategies in which lower transportation costs offset increased inventory carrying costs. Shipping larger loads translates into higher levels of inventory on hand, and the longer transit times associated with intermodal rail versus truck mean higher costs for in-transit inventory and safety stock. But these inventory-cost increases are offset by freight-cost reductions achieved through improved shipment economies, fewer empty runs, and better vehicle utilisation.


Financial impact: Freight-cost reduction is made possible by trading off marginal transportation costs for inventory-holding costs. At the same time, revenue is enhanced because more inventory is readily available to fill orders with shorter lead times. The substitution of inventory for transportation costs by no means suggests that inventory will become a less significant factor influencing total logistics costs. On the contrary, these hybrid strategies emphasise balancing the cost of transportation and the cost of carrying inventory, which includes interest, taxes, obsolescence, depreciation and insurance.


These transport-driven shifts in supply chain strategies are designed to ameliorate transportation challenges, and they achieve those objectives. But it is not widely recognised that their benefits go well beyond that; they also contribute to improvement in an organisation's broader supply chain and financial performance.


Why are prices high?


A conjunction of factors and economic developments lies behind rising transportation costs. At the centre of today's transport challenges are oil prices. Freight movement in most modes remains largely dependent on ever-more expensive and finite fossil fuels, primarily diesel fuel. The price of crude oil is the dominant factor influencing changes in diesel prices. Crude prices have risen significantly since the mid-2000s, but not in a predictable pattern.


Adapted from an article posted on Supply Chain Quarterly
 

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