Riverside Logistics

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BUILDING A RESILIENT SUPPLY CHAIN

Best advice I can give is to Start from the bottom.

In today’s Logistics environment, building a resilient supply chain is more critical than ever. No sure way exists to overcome all the risks that comes your way. Things like the Ukrainian war and the lingering effects of the pandemic have had severe impact on just about everyone’s supply chains. Product lead times are double or triple what they used to be, and that’s if you can get the products at all. The cost of freight, raw materials, labor and finished goods have skyrocketed. Both the International and domestic US transportation systems are a mess. There are containers sitting that can’t unload, there are warehouse shipments loads that can’t be picked up, shipments are taking twice as long to deliver than before, there is a lack of warehouse capacity to store goods, and overall prices for freight, fuel, labor, and just about everything else have gone up dramatically.

Considering this decidedly negative environment, and the uncertainty of how long current conditions will last, what can you do to make your Supply Chain more resilient. Here are some suggestions.

  1. Increase your base of supply. Go from a plus 1 supplier base to a plus 3 base. Extend the geographic base as well. Keep one area from controlling and hurting your supply chain.
  2. Make and get commitments from your transportation providers to provide enough equipment to meet your extended needs. Contract for this capacity and take a “now is better than later” attitude.
  3. Expand your inventory levels and buffer safety stock levels to compensate for longer lead times. Make sure your Min/Max system is reset for larger inventories and longer pipelines.
  4. Lower both your and your customer’s expectations for OTC cycles. Product will take longer in the pipeline. Get used to it and make sure your customer acclimates to the new “normal” as well.

There are three key drivers to establishing better resiliency. “RFC” , “R”edundancies, “F”lexibility and “C”ulture change.

Increase redundancies. Hold extra inventory, increase your supplier base, and lower capacity utilization levels. By being redundant, you are giving up efficiencies. Inventory is cash, unused or not-working cash. This is the tradeoff made when carrying more inventory than your normal model requires.

Added Flexibility. Adopt standardized processes. This lets you switch production across your manufacturing network. Make it easy to substitute your production across the various sites in your network. If they handle the work in a standardized fashion then you can bounce your production and distribution around as conditions dictate, without skipping a beat.

Put key functions in sync with supply chain demands through a centralized organizational approach. Plan to postpone. Give yourself the ability to wait and develop more WIP goods that can be finished in a variety of ways. Align your procurement strategy with your suppliers. Make sure that your supplier relationships are deep and long. Don’t get caught short handed when one of them goes out of business or has a catastrophic event that impedes their ability to supply you.

Cultural change. Have processes that provide for continuous communication across the enterprise, inside and outside the building. Distribute the power for making decisions. If the power is concentrated in a few hands your organization won’t be able to handle disruption well. Those closer to the fire know how to handle it best.

Condition your teams for disruptions, how to handle them, and what the protocols are to fix them.

There are five pillars of supply chain resilience

Vulnerability

Management Culture

Procurement

Operations

Demand & visibility

Vulnerability. Assess your organizations weak links. Where are you most at risk? Shore up as best you can these points of weakness. Make yourself as bulletproof as possible. There are tradeoffs in this process. It is not cheap to build in redundancy and mitigate vulnerable spots in your supply chain. It is better to know and mitigate them on the front end than suffer the consequences on the back end. Almost a “you can pay me now or pay me later” situation.

Management Culture. Management must be fully on board to support the changes necessary to make your supply chain more resilient. They will understand the picture if you provide the correct model of the monetary costs to do nothing vs the upside if you take the right steps…NOW.

Procurement. How you buy, who you source your buys from, and where are extremely important factors in supply chain resiliency. Let’s face it, if you single source in today’s environment, you are in big trouble when that source falls down. You must investigate and understand your alternative supply sources  and put in place a blueprint of how you need to use them.

Operations. There must be a clear level of communication between the operations teams and the procurement teams.  Management must make sure that they are exchanging forecast and plans in a way that produces a clear path forward in dealing with shortage, delays, and cost increases. It is not unusual for Ops and Sourcing teams to have different sets of metrics and drivers that they use. It is extremely important that these teams operate in sync with one another. Otherwise, the results will be very disappointing.

Demand & Visibility. Not enough can be said about making the Demand mechanism as clear as possible throughout the organization.  The more visible the demand signal is, and the more time spent on how to meet it, the better the results will be. Demand signals and forecasts are difficult during normal times of stability. In today’s less stable environment the whole supply chain can get whip-sawed around by the market forces in play today. It is therefore of extreme importance for the organization to put the time in to dial in the organization to demand signal.

Making your supply chain more resilient is extremely important to the overall effectiveness and health of your organization. Spend the time necessary to align your organization on what’s needed to make it as bulletproof as possible. If you do, the reward will be substantial.

Riverside Logistics Consulting does this (supply chain analysis) for a living and would be happy to take a hard look at your individual supply chain and make recommendations on how to shore it up. This process can pay high dividends in a short period of time. If you need more information, contact Jim Durfee at 804-474-7700 extension #4. We’re here to help.

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What Supply Chain Problems should you be planning for in 2023?

Here’s my list of the top 5, the no-fail 5 for Logistics

  1. Rate increases- you can bet that in 2022 rates will continue rising. These (freight rates) however have already shown tapering in May of 2022. Will it continue or is it just a lull in the action? Base rates have reached a level that is just not sustainable in the long term. My advice is to send out RFP’s and RFQ’s in late third quarter or early fourth quarter  to take effect in the first quarter of 2023. Keep a close eye on the drivers for rates, labor cost, equipment cost, fuel costs and borrowing costs. As these stabilize and maybe even start to recede, it will be time to initiate the requests. You should try to avoid the spot market by signing long term contracts that lock in your rates for at least a year. This way you can predictably plan for your logistics cost for the whole year.
  2. Capacity- Trucks have been tight all year. We are starting to see some improvement in the last 30 days. Will it continue? Probably, but do you really want to run your business on a maybe? Capacity will ease in 2023 especially if a recession hits. However, don’t you think that it’s best for you to do something to ensure an adequate supply of trucks or railcars or intermodal containers, to keep the business running? If capacity loosens up, your access to it will improve. But you are still at the mercy of a significant event. A pandemic, a war, a recession. Your best strategy in 2023 should be to partner with someone who can guarantee a steady supply of quality transportation assets. If you are a smaller business, with 100 million dollars or less in revenue, then you should take a hard look at partnering with a third-party logistics company (3PL) to protect your access to capacity.
  3. Service Levels- in addition to higher rates and less trucks, we have seen a serious erosion in service levels over the last 12 months. This is due to several factors. A primary cause in the LTL markets was their inability to attract and maintain labor pools necessary to handle freight at their terminals. On the truckload side, drivers were quitting or retiring in record numbers and that left it hard to find and run trucks. The entire logistics network went out of kilter. This caused severe backups at ports, terminals, warehouses, and manufacturing sites. It can be described as a domino effect. When one piece of the supply chain puzzle defaults, it affects other pieces, which in turn affect others and so forth and so on. If you want or need to improve your service levels, without risking cost inflation, I suggest that you consider partnering with a 3PL who can help find both adequate and reliable transportation for your goods.
  4. Inventories- with all the recent out of stocks (OOS), companies have increased their inventory levels significantly. With inflationary pressures and a possible recession looming, it may make sense for you to anticipate needing a lot less inventory to run your business in 2023. Pay particular attention to the carrying cost of your inventory and the turns associated with it. You need to carefully manage it in 2022 and develop a plan to be able to reduce it in 2023 if a recession hits. Inventory is idle cash. If sales volumes go down, that means more inventory related cash is tied up in inventory and is not helping the business.
  5. Customer expectations- your customers, like you, are weary of the pandemic related supply chain issues. Just like your ability to serve them has degraded, so has their ability to serve their end users. All in all, expectations have come down to earth, hard and fast. Currently, when you explain that a shipment or order won’t be getting to your customer as fast as they would like, its easier now for them to understand. This condition will change, more than likely it will happen faster than you think and require major adjustments to how you go to market. Be prepared to change your service model metrics. By change, in 2023, this will require much more stringent on-time delivery performance, less out of stock situations, and probably lower costs.

Right now, understanding the supply chain in 2023 is a crapshoot. Sitting back and taking a wait and see approach will not help. You must plan for what you think will happen, as well as, at the same time bullet-proofing your logistics network as much as possible. One key facet to this process should be taking a hard look at using a 3PL to enhance your logistics network.

Riverside Logistics is a 3PL with 25+ years of experience in warehousing and logistics. We have both the experience and know-how to help you “bullet-proof” your logistics network. We would love to have an opportunity to discuss this with you. We can be reached at 888-999-0734. One of our Logistics Management Consultants would be happy to help you.

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How would a strike at the West Coast ports impact us in 2022?

A potential strike at the West Coast ports  appeared imminent on July 1st but was averted,  for now.   The West Coast ILWU, International Longshore, and Warehouse Union had a contract up for renewal (July 1, 2022). They argued that since the Steamship lines have raised their rates significantly, and the port operators have made exceptional profits, that they should also share in the profits.  Not unreasonable.  Fortunately, as of this writing, it looks like an agreement was reached.

But what if the strike had happened? Below is a likely scenario….

First, the west coast would back up until long after the strike. Second, the east coast would get overloaded, very quickly, either due to sympathy work slowdowns or significantly increased workloads that exceed the east coasts port’s ability to unload and process containers. It would be a mess. As shippers re-route or diverted their shipments to the East Coast to compensate for the strike, the East Coast logistics networks would suffer. Instead of traffic coming from the west to east, those lanes would shut down. The capacity in the west would have less freight flowing back to the east coast so there would be a general lack of trucks to handle long haul freight, in either direction. The trucking network would be negatively impacted and take a long time to sort out. Intermodal movements would suffer as well. This would impact drayage carriers, produce container shortages and result in higher rates.

To summarize, everybody would suffer if the strike had happened, whether or not you ship internationally. The logistics network would be  out of balance, so costs would rise, service levels would drop, and every shipper would be miserable. Remember that it’s a network, with lots of moving pieces. When these pieces don’t move like they’ve been designed to, the network starts to fail. That failure is painful to everyone.

If the Federal Government had stepped in it would have tried to avert the strike. If that happened, then there would still be consequences. The West Coast ILWU could show their ire through work stoppages, slowdowns, sick calls, and any number of methods to slow the flow and impact as many people as possible to demonstrate their worth and power.

What should you do as a shipper to prepare? Here are 3 recommendations to try and protect your margins and maintain your logistics costs at a reasonable/workable level:

  1. Try partnering with a 3PL to lock in rates and services. 3PL’s have multiple contracts with carriers and these can help you manage your costs and protect your service. If you’re a medium to small sized shipper, this type of relationship can really help you.
  2. Pool your resources. Try to concentrate your business into larger pools of freight and sign annual contracts to lock in rates for at least a year. Don’t play the spot markets. You’ll lose in the long run.
  3. Have a plan. Determine what you will do if a strike happens, and you still have trouble shipping to customers. Be transparent with your customers. Make sure that they know what you’re experiencing, what you’re doing about it, and set reasonable expectations with those customers so they can plan accordingly. Make sure you re-visit your plan periodically and adjust it as the picture changes.

It’s not a good time right now for the logistics community. There are several potentially bad environmental factors hitting all at the same time. However, if you plan, partner with a 3PL (a good one) and pool your resources, you stand a much better chance of maintaining your relative competitive position in the marketplace.

Fortunately, a west coast port strike was averted.  But risks still exist in the supply chain.  The government can’t afford to let that happen, neither can the steamship lines or the port operators. A strike was either delayed or pushed off. However, can you afford to sit back and do nothing? It would be wise to discuss and plan for potential disruptions in your supply chain. Hopefully, you’ve weathered the Pandemic related supply chain woes and now this next potential disruption is no longer imminent. At the very least, if you are a small to mid-sized firm, try exploring the possibility of partnering with a 3PL to can help you navigate these tricky logistical waters. There isn’t any downside risk to looking into a 3PL partnership, and there’s a lot of help to be had by doing so.

Riverside Logistics would be happy to help you plan your logistics network, bulletproof your carrier base, and keep you competitive in the marketplace by providing cost effective solutions to your warehousing and transportation needs. After living through the pandemic and the effect it has had on your supply chain, you understand how fragile the network is and how impactful changes to it can be. Don’t be a victim of your supply chain without at least looking into a 3PL relationship. We are here to help and would be very willing to consult with you on potential opportunities to shore-up your network.

Riverside Logistics can be reached at 804-474-7000 Option 4. Ask for a LMC consultant and get started on being proactive towards your supply chain.

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How does the price of a barrel of oil affect your freight cost?

Freight Rates have been going up at a record pace lately and one of the main reasons is that fuel prices are also at record levels.

In March, U.S. oil spiked to a 13 year high at over $130/barrel. A key driver was the Russian Invasion of Ukraine. In addition, US producers were slow to respond. They just didn’t have the capacity or willingness to ramp up quickly. Right now, demand is high, and supply is constrained, so that means the upward pressure on prices will continue.

When looking at how fuel relates to oil, it’s helpful to understand that refineries produce about 11 gallons of diesel fuel for every 42 gallons of crude oil, so the higher the cost of a barrel of oil, the higher the pump price for diesel. Diesel is the primary source of fuel for large tractor trailers and accounts for approximately 20% of a carriers cost to operate, so it’s going to highly impact trucking related freight rates. This will also take capacity out of the market as independent truckers adjust record high diesel prices. Now  let’s look at different types of loads and transportation methods and how high diesel prices will change your freight cost.

Trucking Types:

Linehaul rates, the base rates for moving product from point A to point B, are triggered primarily by supply and demand factors. Load to Truck ratios drive spot pricing (daily pricing on freight load boards). The more loads and less capacity the higher the linehaul rates. Fuel Surcharges, on the other hand, are usually setup as a sliding scale, based on the Department of Energy ( D.O.E.) national average price of fuel. The scale slides up and down in cents per mile or as a % of revenue in accordance with designated bands of fuel costs. Usually, these fuel surcharges (FSC’s) are in cents per mile for over-the-road truckers, and in % of revenue for Less-than-truckload and Small Package. Current FSC’s are running around 31% for LTL and 96 cents per mile for truckload with diesel at 5.51$/gallon. They have increased dramatically since the first of the year.

The same dynamic between oil costs and fuel costs impact the other modes of transport as well. Ocean, Rail and Air transport all have significant expenses tied to fuel costs.

Ocean

For Ocean, fuel costs represent 50-60% of their operating costs.

Air

For Air carriers it’s more like 40% and is their biggest variable expense. This expense affects air transport belly freight as well as parcel express freight.

Rail

For railroads fuel cost represent about 20% of their operating costs. When fuel prices rise, rail becomes a more desirable solution vs truck, the converse is true when oil and fuel prices drop.

What is being done about all this?

The Carrier community is doing a couple of things.

Air carriers buy fuel hedges to guard against upward price swings. However, when prices drop, margins get hurt. They pass along fuel costs in the form of surcharges on their rates. These are currently running in the neighborhood of 25% of linehaul costs.

Ocean carriers are doing what’s called “slow steaming” to mitigate fuel costs. By reducing their speeds, they can save up to 59% of their fuel costs. The downside is that the travel time increases significantly. From days to weeks in some cases. Ocean carriers charge what’s called a “Bunker Adjustment Factor” or BAF, which is usually tied to the cost of Brent Crude Oil. Currently these charges run by trade lane and are reaching all-time highs of over $600 per 40’ container.

Rail Carriers are running diesel-electric locomotives which capitalize on the benefits of both energy types to improve the efficiency of their travel costs. Railroads, however, also impose mileage-based fuel surcharges. These have doubled since the beginning of 2022. They are now around 76 cents per mile.

The EIA or US Energy Information Administration posts the national average diesel price every Monday. Using this number along with the MPG of a truck (usually around 6mpg) and a pre-determined baseline (typically $1.50/gallon) you can calculate the Fuel surcharges that a motor carrier would ask for. The surcharge scale used is open to negotiation with shippers. Many shippers create their own fuel surcharge tables and when contracting with carriers, may force the carriers to use them. At the end of the day, Line haul cost + fuel surcharges = the total cost of transportation. So, if the shipper has a shipper-favorable fuel surcharge table, then probably the line haul rates will be increased by the carrier to compensate. At the end of the day the carriers must try and protect their margins and recoup their costs.

Depending on what type of shipper you are, a lot of the fuel impact depends on your base rates and whether you buy transportation on a “spot” or a “contractual” basis. If you buy contractually, which is recommended, your base rates usually remain the same for the term of your contract. Most contracts are a for at least one year. If you buy your transportation on the spot market, then you are exposed to the vagaries of the market. Fuel cost is always a floating cost that traditionally moves with the price of oil. Linehaul Base rates float on the spot market based on supply and demand in each market. If there are more loads than trucks, then rates go up. If the converse is true, then rates go down. Just remember if your base prices go up, and fuel is reflected as a percentage of base rates, then you take a larger hit than you would if the base rates didn’t float, i.e.., if you had contractual linehaul rates that were stable for a period. Not only will this save you money, but it will also allow you to plan you costs better.

The goal of any shipper is to negotiate a fuel surcharge that is favorable to their business and helps them maintain a strong competitive position. There are a few items that shippers should consider when deciding on a carrier to ship their goods.

  • Make sure the carrier fully explains how their fuel surcharge formula works and when it is adjusted. For example, weekly, monthly, quarterly, every Tuesday, etc.
  • Don’t assume that a high fuel scale base rate is bad. When the base fuel rate is higher, fuel surcharges usually are lower. Also make sure your cost bands are as large as possible. This will help minimize fluctuations.
  • If you negotiate a favorable FSC scale, make sure that your base linehaul rates are fixed for at least a year. This way your base doesn’t change except when it’s time to re-negotiate the contract. Thus, allowing you to better plan your costs for the year.
  • Make sure that when comparing carriers and modes that you fully understand how their individual fsc’s apply. Also, don’t forget to calculate the transit implication of using one mode over another. Dollars saved on transport can be lost because the products don’t arrive as soon as they are needed.

What does all of this mean for your freight cost in the next year? Lot’s of uncertainty and increasing complexity of solutions that provide a secure supply chain at a market price that allows your business to compete and grow. With all of this uncertainty, small & mid-size companies are going to find it challenging to mitigate cost and remain competitive.

Riverside Logistics is an expert in logistics costs and can help you with fuel surcharge negotiations and setting up scales favorable to your business. Give us a call at 804-474-7700 extension 82. We are here to help!

 

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What can Supply Chain Consultants do for me?

Consultants sometimes have a bad rap right out of the gate. After all who wants someone to tell you how to do your job or run your business?

Frankly, if your business is growing and changing you probably need a consultant to help you chart your future.

This is not a small under-taking and it can be challenging but very rewarding when approached with the correct partner. The key is understanding your objectives, what is realistic to expect as a return on your investment, and the type of knowledge that a Logistics Consultant can bring to the table.

When do you need a consultant?

Some good indicators might be the following:

  1. You are either privately held or a division of a large company in a specific market that is a new focus.
  2. You have reached 50 million dollars in sales revenue.
  3. You have primarily operated from one location.
  4. You want to grow your business by expanding geographically.
  5. You want to grow by acquisition.
  6. Your current logistics team is knowledgeable, but they have never operated multiple locations, evaluated multiple modes of transportation, or possessed the support staff to train new employees.
  7. Transportation is a big part of your total cost of going to market.
  8. The value of your business in either service or manufacturing is very high per employee.
  9. You have product coming through a port but are uncertain of what ports are best and why.
  10. Your Supply Chain Costs are increasing dramatically in Warehouse and or Transportation and you do not have a formal way to measure your investment.

Let’s look at and talk about Supply Chain and Logistics Management Consultants (LMC). They are SME (subject matter experts) on how to move your Logistics Network from where it is today, to where it needs to be in the future. Network evaluations are relatively painless, but they take time to complete properly. For example, if you feel that a 6-week consultation will allow you to plan for and adapt to a new network, don’t waste the money.

If, however, you realize that the process could and should take up to 6 months to fully realize, then go for it. Because like most things that are keys to your business success, they take time.

Supply Chain costs are rising, becoming more complex and now demand more automation. It only makes sense to have someone who has been down the path before, who can guide your team and bring in expertise if your current management does not provide that expertise. As your business expands, its demands for adequate supply chain management increase. These increases are like stepping-stones. They go up in increments or buckets. For example, you may have to go from a single warehouse to multiple warehouses. Or quite the opposite, you may have grown by opening small warehouses throughout your network and now need to take a hard look at a smaller number of warehouses, maybe even just one, with a larger single set of inventories. And, oh by the way, you may need a WMS (warehouse management system) and a TMS (transportation management system) or an upgrade to both if you already have some in place. Additionally, how do you, or how will you, handle managing you transportation needs. Will you do it “in-house” or utilize external management?. What are the upsides and downsides of each approach? How have you accommodated supply chain risk? Did you factor in the trade-offs between operating different (multiple) facilities as opposed to one large facility? This logic also holds for how, when and where you source your product. If the pandemic has taught you anything, it has taught you the value of operating a flexible supply chain for both sourcing as well as moving product through your system.

So how does a LMC Consultant provide you with value?

Here’s how: If competent, they can create a roadmap of “AS IS” and “TO BE” showing how you stack up against industry baselines, how you maximize your competitive supply chain profile and how to develop a sustainable “TO BE” supply chain that helps rather than hinders your business as it expands.

All in all, the question is not whether you need a LMC consultation, its whether you can afford NOT to hire and use one. Market conditions are moving faster than ever. How long would it take your management team to learn what they need to know? Savings in speed can provide a lot of value. Rather than debating a topic for a year a consultant can provide solutions much faster. How much is that worth to your business? If you do not hire a consultant will opportunities vanish?

Typical savings that we encounter from our own consulting efforts usually generate savings in Supply Chain costs, NET savings, of between 15% and 25% long term. If you’re in it for the long term and you have a business that is growing, you need to strongly consider hiring a LMC Consultant to help steer your business through the myriad of supply chain issues affecting your business now and in the foreseeable future.

Riverside Logistics, has been in business for over 25 years and has accumulated a very “long and strong” set of capabilities to analyze, recommend, and execute a Logistics plan for you company. Give us a call at 804-474-770 extension 82 . We are here to help!

 

 

 

 

 

 

 

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