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Rising costs of logistics affect U.S. supply chains

October 1st, 2008 / By: / Markets, Sustainability

How soaring fuel costs are affecting your supply chain in the U.S.

Logistics is defined as the flow of material, information and money between consumers and suppliers, according to the Supply Chain and Logistics Institute (SCL) at Georgia Tech in Atlanta. Another term for logistics is “supply chain management.” Harvey Donaldson, director of SCL and associate chair of Georgia Tech’s H. Milton Stewart School of Industrial and Systems Engineering, says, “You optimize supply chain flow when material, information and money flow simultaneously … in real time and without paper.”

Supply chain logistics consists of:

  • warehousing
  • customer response
  • inventory management
  • supply
  • transportation

While logistics has always comprised a significant component of total costs, the relative size of that total has risen rapidly over the last five years. Lowell Unruh, vice president of business development, Distribution Solutions Inc. (DSi), Plymouth, Mass., says, “Logistics costs increased 23.96 percent over the last five years as a percentage of total sales. Transportation costs increased 33.96 percent over the same time period as a percentage of total sales.” Because of the increasing importance of these issues, DSi, a logistics consulting firm, recently became an IFAI business service partner, providing logistics assistance to association members.

Chart 1 shows combined logistics costs as a percentage of total sales over the last five years. Table 1 shows logistics component costs over the same time period. In its June 15, 2007, issue, Forbes reported that “The costs of logistics in the U.S. soared more than 15 percent last year, the largest rise in 30 years, meaning shipping and forwarding sopped up 9.5 percent of the gross domestic product.”

Clearly, the two most significant factors driving logistics costs are escalating fuel costs, and the need to operate in a global economy. And if the former continues on its current trend, it could well have significant impacts on the latter.

Georgia Tech’s Donaldson says, “We could well see a reversal of the trend to take manufacturing offshore. There is some evidence of that reversal already. With rising fuel costs driving up the cost of shipping, plus new technology and innovation, we could well see an increase in North American manufacturing. Although much of it might take place in Mexico.”

BusinessWeek (June 30, 2008) reports: “This would seem to be a good time for an American manufacturing renaissance. The economics of global trade are starting to tilt back in favor of the U.S. to a degree unseen in a generation. Spiking oil prices are driving up shipping rates. The cost of sending a 40-foot container from Shanghai to San Diego has soared by 150 percent, to $5,500, since 2000. If oil hits $200 a barrel, that could reach $10,000, projects Toronto financial-services firm CIBC World Markets.”

“Improving logistics costs today involves two main areas: controlling inventory and controlling transportation costs,” says Donaldson.

Good inventory management saves companies money

Captain George Zeberlein, U.S. Navy (ret.), who served as Chief Supply Officer aboard the USS Boxer, a helicopter landing carrier, says, “Controlling inventory means having the right components at the right place at the right time, and nothing more.”

Two of the best examples of good inventory management in the U.S., says Donaldson, are Dell Computers and Amazon.com. These two companies carry virtually no inventory—they build or compile to order. But such practices won’t be successful if order entry to shipment cannot be accomplished quickly and accurately, a process these two companies manage superbly.

“It requires an agile supply chain,” Donaldson says.

You don’t have to be a huge company to save money and labor by managing inventory properly. Durasol Systems LLC of Middleton, N.Y., produces high-quality awnings—on a custom order basis only. Larry Bedosky, marketing director, says, “We just keep our 20 most popular fabrics in stock. The rest we obtain for specific orders as we need them.”

Durasol usually orders those 20 fabrics in bales, each bale containing six 55-yard rolls. The company orders other fabrics in only 16- to 20-yard pieces to fill orders calling for them. The company also maintains an inventory of a few parts standard on all awnings. Again, it acquires the rest as needed.

Collaboration and outsourcing cut transportation costs

According to Donaldson, there are two ways to control transportation costs: getting better utilization of capacity, and controlling direct costs—labor and fuel.

Since the latter is going up—there’s basically nothing you can do about it—concentrate on the first method. There are a number of possibilities.

One possibility is through collaboration. More and more companies are working together to manage costs. For example, in Atlanta tire and rubber manufacturers cooperate in purchasing transportation. Through sharing resources, the companies reduce their transportation costs, despite competing in the same marketplace. For fabricators who are IFAI members, there’s another group option, as select carriers provide discounts for the association’s membership.

Another possibility is through outsourcing transportation rather than owning your own fleet. A third party provider has the inherent advantage of better utilization of capacity.

“Communication is the key to any successful logistics program,” Zeberlein says. Technology has improved the way companies communicate up and down the supply chain. The invention of the bar code has provided an excellent means of tracking and tracing a product, but now there is a new visibility system: radio I.D. tags, which provide auto identification and enable you to tightly manage your inventory.

Routing technologies create fuel-efficient travel

Georgia Tech pioneered the utilization of a geographic information system, says Donaldson. This routing software provides the optimum way to get from point A to point B in the most fuel-efficient manner. By obtaining this most precise routing, companies have realized as much as 5 percent reduction in transportation costs—no small competitive advantage in today’s economic climate.

One somewhat unexpected example: Both UPS and the U.S. Post Office are redoing their delivery routes to minimize, if not eliminate, left turns. Those operations expect to save millions of dollars by doing do, according to Donaldson, because each one has more than 100,000 vehicles on the road daily.

Small operations can save as well. Internet-based routing services are available that allow companies to download the next day’s delivery schedule in the evening and have the day’s routing plans available first thing in the morning.

“Technology offers hope for the small company,” Donaldson says. For those looking for training, SCL offers many logistics short courses and two Supply Chain Executive Forums each year.

Unruh advises companies to take long, hard looks at their shipping departments. “For many,” he says, “this is ‘the way we’ve always done it.’ And that’s not good enough. You should always look for better arrangements.”

Controlling transportation gives companies a competitive edge

Many shipping managers have deep and long-term relationships with certain carriers; but sometimes, these can be unprofitable—or even unethical. Unruh cites an example of a company that spent $30 million on freight in one year—a number that proved to be $11 million more than standard freight costs would have been. The shipping manager, however, was the proud owner of a new home on Maui, built by—you guessed it—the freight carrier.

Companies that keep transportation under control can have a competitive advantage, according to Unruh. Being on time with cheaper shipping costs will get you the business, if your product quality is at least equal to your competition’s.

“Challenging” is the word Larry Bedosky uses to describe transportation requirements at Durasol. “We are in an ugly freight industry,” he says. Almost all of Durasol’s awning cartons measure 12 x 12 inches in two directions but can stretch out as much as 30 feet in the third, and the company never has a full truckload of custom-made awnings to ship. For Durasol, long-time relationships are paying off. “We have very few transportation suppliers, and because of our long relationships, we receive sizable discounts.”

Over the years, Durasol has established what Bedosky calls “a happy average” freight cost. The company charges a flat rate for shipping a retractable awning from its New York facilities, billing customers a standard amount, regardless of weight and whether it’s going to New Jersey or the state of Washington. Some of the larger dealers who receive 7-10 units at a time have them delivered freight collect, Bedosky says.

Transportation costs are becoming a larger and larger percentage of total sales for companies across the board. No matter what your product or where you deliver it, a fresh look and constant monitoring can be critical to your company’s success—or even its survival in some industries. In today’s economy, it’s more important than ever to make sure you’re keeping your logistics under control.

Mac Isaacs is a writer and former editor based in Griffin, Ga.

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