When the global economy was in recession and retailers were moving fewer goods, shippers were able to negotiate transportation rates down due to excess capacity. The cost savings naturally benefited shippers’ bottom lines, but now that revenues are flat to last year for most shippers, many have had to tamp down in terms of capacity and can’t get back to their pre-recession good footing.
According to Logistics Management’s 24th Annual Study of Logistics and Transportation Trends, demand for transportation has exceeded available capacity for multiple transportation modes, but the imbalance won’t bode well for costs.
“Forecasts indicate that this imbalance will increase as the driver shortage in trucking gets worse in the future—and the new reality for shippers is one of transportation rate increases into the foreseeable future,” the report noted.
And for the first time, carriers—not shippers—are in the position of power.
“In a capacity constrained environment, carriers will be selective on how they position and reposition their assets in an effort to maximize profitability,” Tommy Barnes, senior vice president of operations at Coyote Logistics, said. “If your freight doesn’t fit their network, carriers are proactively working with their strategic partners to develop solutions that benefit both parties.”
The transportation study findings show that for some companies, the increase in transportation costs as a percentage of sales has been sizable, and those with annual revenues between $1 billion and $5 billion have taken the biggest hit.
Companies earning between $2-$3 billion saw their average transportation spend increase nearly two and a half times from 2014 to 2015.
“For shippers who became accustomed to reducing a sizeable percent of expenditure from the transportation budget through various means, the past 18 months have been a shock,” according to the report. “In fact, the “addiction” to savings has compelled many companies to seek new ways to achieve this goal in a constrained environment.”
And for companies putting omnichannel strategies in place, finding ways to save will be even more challenging. Transportation budgets today are being spread over multiple distribution channels, with the largest percentage (36.2%) going to shipping goods from a plant direct to consumer.
“Without question, an integrated omnichannel distribution strategy is one of the most complex supply chain plans to implement,” the report noted. “Because many companies manage their distribution channels independently, the transportation budget will be stretched tightly, creating internal competition for limited dollars for this activity.”
The three main challenges the study found that shippers face are changing logistics and supply chain requirements, distribution costs and demand uncertainty. And though flat revenues have put added pressure on shippers to minimize costs, they can’t do so at the expense of service.
However, the survey found that service levels have in fact declined. Shippers sending goods via rail and intermodal posted the biggest declines in service, with problem areas including equipment availability, on-time delivery and correct invoices.
Shippers interviewed for the study said years of seeing transportation costs as an area to easily generate savings to improve gross margins, has contributed to the current lackluster service.
“Our success in obtaining cost savings has in fact created a corporate obsession,” the report noted. “Current and future changes in the transportation operating environment have made this dependence unsustainable.”