Transportation Strategies to Offset Inflation
Business professionals have had a tough time navigating fluctuating logistics costs over the past two years. But hold on! There are ways to keep your balance while negotiating price increases.
Gift-giving season may have concluded, but for many people it was plagued by an unwanted visitor. Not the Grinch, but inflation.
Prices have been on the rise since early 2021. In April, the consumer price index expanded by 4.2% annually, according to the Bureau of Labor Statistics. That figure rose to 8.9% growth 18 months later in September 2022.
Price growth varied among particular commodities—in May 2022, for example, the cost of bacon averaged 18% annual growth, orange prices rose by 17%, and used cars were up 23%.
Inflation isn’t inherently undesirable for an economy. Historically, the Federal Reserve has aimed to keep prices accelerating up to 2%.
The trouble starts when price growth advances much faster than 2%, as has been the case in the U.S. economy for nearly 24 months. To rein in excessive inflation, the Federal Reserve raised interest rates to 4.25-4.5% throughout the course of 2022.
These circumstances have particular ramifications for the supply chain, especially transportation costs.
A confluence of factors—from wages to materials to driver shortages—drove up costs over the past two years. One of the primary ones was diesel prices.
The cost of diesel rose 55%, to $5.81 per gallon, on average, in the first half of 2022. While most consumers struggled to absorb higher gas prices, executives tasked with purchasing logistics services had the additional headache of preventing fuel surcharges from bleeding into the price of other products.
“We’ve had clients spend more than $5,000, just in fuel, to move goods from the Midwest to the West Coast region,” says Jeff Pape, senior vice president and director of product and marketing for transportation at U.S. Bank.
Ballooning prices didn’t just impact the cost to keep a vehicle running. They also bled into the price of repairs and replacements for vehicles, which pushed up costs for carriers, notes Ann Marie Jonkman, senior director of global industry strategies at Blue Yonder, a supply chain software company based in Scottsdale, Arizona.
But it wasn’t just inputs that pushed up prices. As online shopping rose in popularity, transportation networks had to shift to meet demand.
“We weren’t ready for it,” says John Haber, chief strategy officer at Transportation Insight, a third-party logistics firm based in Hickory, North Carolina. “The overall profile of the consumer changed, and that creates a different type of transportation network. “Deliveries skewed heavily into parcel,” he adds. “That’s an expensive service to begin with, and then network capacity got stretched to the limit.”
Already notoriously expensive, momentum toward parcel caused prices to accelerate even more rapidly in 2022. Both FedEx and UPS increased base shipping rates by 5.9%.
That trend will continue into the new year. In October 2022, citing an “inflationary backdrop”, FedEx and UPS each unveiled plans for a 6.9% rate increase in 2023.
Meanwhile, in November, the U.S. Postal Service announced that it would follow suit, raising prices from 5.1% for Parcel Select shipping, to 7.8% for its First Class Package service in the coming year.
“That’s without any additional surcharges,” notes Josh Dunham, CEO and co-founder at Reveel, a shipping intelligence platform headquartered in Irvine, California. “An over-maximum limit charge, for example, might run upwards of $1,000 per shipment.”
The Expensive Final Mile
To compound the financial pressure, parcel shipping often entails final-mile delivery, explains Nick Brown, director of supply chain solutions at enVista, a software and consulting firm headquartered in Carmel, Indiana. Not only does the last transportation leg generate a significant portion of shipping expenses, but promises of free shipping can make it difficult to transfer those costs to the end consumer.
Accessorial fees have pushed rate increases above 10% for Reveel’s customers, according to Dunham.
He recommends negotiating with carriers to tame parcel shipping fees. “It’s critical to focus on areas with the most spend,” he says. “One big mistake we see is shippers hammering carriers for a discount that only impacts 2% of their shipping profile.”
Rising transportation costs have coincided with demands for fast shipping, and not just from consumers.
In its survey, The Delivery Economy and the New Customer Experience, project44 found that 94% of people who make purchases on behalf of a company expect the same level of satisfaction as when they make a personal purchase. This includes short lead times, inexpensive shipping, and a transparent delivery process.
“Speed is expensive,” says Brown. “Intermodal costs less, but it takes a few more days. Internationally, a boat is 20 times cheaper than a plane. The big question is whether you can still support your customer with a slower mode.”
One way to get around the apparent impasse is to implement a robust inventory management strategy.
Keeping a reserve of inventory close to its next destination can reduce reliance on expensive transportation modes.
For example, holding safety stock near a production facility could help avoid last-minute air shipments, says Erik Wanberg, head of inventory management at Taulia, a supply chain finance software provider headquartered in San Francisco.
Reworking inventory management isn’t an overnight solution. “But managing the flow of goods can set you up for flexibility to react in the future,” says Brown. “Once your stock is in the right place, you can choose the right mode, at the right service, at the right price.”
It’s one thing to design a transportation strategy when shipping costs are (relatively) stable. It’s another when a confluence of factors collude to push up logistics prices.
In the short term, a company might increase reliance on the spot market to move loads, or pass increases along to their customers. But these choices don’t fit for all verticals, and could sour relationships with business partners or the customer base. Instead, there are ways to gain efficiency within existing partnerships.
One is to consolidate small shipments from less-than-truckload to truckload. “If I deliver along a particular route five days per week, I could lower the frequency to completely fill a truck,” says Dr. Madhav Durbha, vice president of supply chain strategy at Coupa, a business spend management platform based in San Mateo, California.
Digital twin technology can help to preview the impact of different shipping scenarios. By creating a digital model of their supply chain, shippers can see the effect of changing their replenishment schedule.
Transportation needs might also differ based on shipment volumes. To rein in trucking procurement costs, some shippers are segmenting lanes by quantity of freight.
“High-volume, consistent, balanced lanes are best served by a dedicated or private fleet,” says Claude Pumilia, president and CEO of DAT, an analytics platform and load board headquartered in Denver. “Medium to high-volume, or one-way lanes, should be incorporated into the annual bid and run through the traditional routing guide.”
For low or sporadic volumes, Pumilia recommends tendering loads to a freight broker or third-party logistics firm. A logistics provider can negotiate rates based on economic conditions, to minimize the vagaries of the trucking market.
Diversifying the carrier base can prove especially useful if freight networks shift. If an incumbent carrier’s freight portfolio changes, it could make a particular shipper’s loads less attractive—and more expensive.
Here’s an example. Say Carrier X has contracted for 10 outbound loads per week from a Minneapolis-based plant. If that carrier also delivers 12 loads into Minneapolis for another shipper, they could price outbound shipments at a relatively low rate.
If Carrier X lost their inbound shipper, however, that could force them to run empty equipment into Minneapolis, thus increasing their linehaul rate.
One way to combat this is to continually hold procurement events, and invite new carriers to them, recommends Dr. Jason Miller, associate professor of logistics at Michigan State University Eli Broad College of Business.
A shipper’s relationship to their transportation provider is as important as any financial calculation. Rising transportation costs can incentivize businesses to improve truck utilization, but in doing so, shippers must be aware of the impact that a new strategy could have on a carrier.
Take driver detention. Nearly half of drivers wait at least two hours to get loaded at a shipping facility, finds the American Transportation Research Institute. Those delays cost truckers nearly $1 billion in wages annually, and increase the risk of accidents on the road, according to the Department of Transportation.
Shippers should be mindful of how changes in lane density and utilization affect their core carriers, especially if they lead to longer wait times and fewer trip miles for their drivers. “It can put long-standing carrier relationships and vital capacity at risk,” Pumilia cautions.
Conversely, nurturing robust communication can be beneficial to all parties. Instead of indiscriminately soliciting trucking capacity, Ryan Polakoff, president of Nexterus, a supply chain engineering company based in New Freedom, Pennsylvania, advises shippers to ascertain their carrier’s imbalance level and find out what type of freight they need.
“Companies have to learn how inflation impacts their network,” he says. “Having a transparent conversation helps everybody work on a mutually beneficial strategy to overcome rising prices.”
Inflation may have hit an inflection point in the second half of 2022. After peaking at nearly 9% in June, price growth eased in the second half of the year. By November, the consumer price index slowed to 7.1% annual growth, finds the Bureau of Labor Statistics.
Transportation rates headed back toward normal territory at the end of 2022 as well. Average truckload spot rates, which began the year at $3.16 per week, approached $2.50 by August, according to DAT. The Cass Inferred Freight Rate, which measures expenditures divided by shipments, slowed nearly every month in 2022.
The declines aren’t exclusive to trucking, either. The average cost to ship a container from Asia to the U.S. West Coast in September 2021 exceeded $20,000. One year later, the price hovered around $5,000.
Logistics costs don’t always correlate with consumer prices. A cooling economy and reduced bottlenecks, however, could serve to push both down in the coming year.
That doesn’t mean it’s time to start squeezing pennies out of carrier contracts.
“The shippers that do the best are those who are perceived as being reasonable by their carriers,” says Avery Vise, vice president of trucking at FTR Transportation Intelligence. “Rather than waiting for the market to turn south, or trying to make up for what they went through in 2021, they can get much more stability by creating trust with their carrier base.”
With the right combination of strategy and relationship management, business logistics executives can let some air out of the tires of inflated transportation costs.
Money in the Bank
When costs rise, it benefits companies to amass as much working capital as possible. There’s no shortage of ways to use it in an inflationary environment.
But carrier payment terms might not come to mind as the first source of additional assets. After all, carriers need those funds to keep their own operation running. As of January 2022, trucking firms netted a profit margin of only 1.85%, shows data from the NYU Stern School of Business.
U.S. Bank’s trade finance solution allows shippers to extend their payment terms while paying carriers within the original deadline, explains Jeff Pape, senior vice president and director of product and marketing for transportation at U.S. Bank.
The system audits carrier rates against a shipper’s payment terms. If the terms match, the carrier is paid immediately.
On-time payments can help you become a shipper of choice. “There’s no question of ‘The number of widgets you billed me for isn’t what I received,’ or ‘I overpaid by 10% so I’m going to deduct it from the next invoice.’ All of those discrepancies are resolved within the platform,” Pape explains.