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October 27, 2022 by Logistics

If I were making decisions regarding my Company’s Logistics functions and my Supply Chain, what would I do now?

The current logistics environment and the status of the Supply Chain are very confusing right now….for everyone. One minute capacity to move shipments is scarce and expensive, the next moment its loose (available) and less expensive. Container rates are thru the roof, then they’re not. Warehousing space is unobtainable, a lot more expensive, and the options are fewer and far between.

Let’s first look at some of the key drivers affecting the Supply Chain and the Logistics community.

  1. Cost of Capital

When money gets more expensive and harder to get investment goes down. This means carriers begin to extend their equipment life cycles, cut back on new equipment investment, and generally hold off on growth plans. The net-net of this is that your access to capacity, warehousing and such becomes harder and more expensive.

  1. Labor Resources

Logistics as an industry is a touch and feel type of environment. Most of Logistics Labor  consists of drivers and warehouse workers and both must be physically on the job to perform their work. In addition, even pre-pandemic, both were in short supply. Now that demand for these roles has increased back to pre-pandemic levels, they are still a scarce resource. This translates in two ways. First it causes upward pressure on labor rates to keep workers from leaving. Second, it puts downward pressure on Logistics Providers ability to grow their operations to meet demand.

  1. Inventory Levels

Due to the pandemic, increases in demand and the length of the supply cycle inventory levels were increased dramatically. All the inventory had to go somewhere so it sucked up available warehouse space, containers, and trailers. Turns out the demand for goods tapered faster than anticipated and now inventories are too high and sitting too long. This means that space is at a premium, containers and trailers used to store product are not achieving good utilization rates and combined, these factors raise costs and lower service levels throughout the supply chain.

To encapsulate the main two sides of the equation, Supply is too few and Demand is too high. The Supply Chain functions most effectively when these two factors are closely balanced. Conversely. If they get out of balance,  life in the Supply Chain is “difficult”. Like the last 2 years.

What I would do if I were you…run and hide. No, seriously I’d wait it out. I’d use the information I have at hand to build a plan on what you want to achieve with your supply chain and how you think that can be accomplished. The market is in transition right now. Rates are moderating, truck capacity is loosening, international volumes are dropping as are international container rates. However, a potential railroad strike is looming which could at the very least result in rail delays, which in turn become truck and container delays.

Now let’s talk about relationships. As a 3PL we (Riverside Logistics) get to see and interact with a lot of different supply chains handling a lot of different products and running on different criteria for execution. This means we have a pretty good thumb on the pulse of the supply chain. The overall Supply Chain can swing one way or the other, dramatically, and quickly. You must be nimble and have options available to you to handle these machinations. One very capable way to prepare for Supply Chain shock is to partner with a 3PL and to build a relationship of trust with that 3PL. When you do that, you get the benefit of their expertise as well as insight into the logistics markets. This can be a powerful tool for you to use when competing in the marketplace. 3PL’s usually have access to a substantial portfolio of carriers and modes. They know how and when to use them to execute competitively. That’s their business. They also in many cases have knowledge and capability in the warehousing space. They can tell you what market occupancy rates are like in the markets they play in and can help you find and manage space that meets your needs in the markets they serve.

So, lets recap. Right now, there are a substantial number of headwinds and tailwinds impacting the Supply Chain. To sort them all out will take some time. It behooves a company to sit back and let the leaves fall out of the trees a little more so you can see what’s coming next. It is also a good idea to try and build a strong working relationship with a 3PL to let them assist you by applying their expertise in the logistics markets.

It’s a little scary in the supply chain right now. If you try and “Time The Market” you’ll probably fail. Just like with the stock market, timing is not a good idea. Taking a long view is a better strategy and one that should pay dividends in the long run. Hope this advice helps set you on a path that provides your company with a good competitive posture in todays supply chain.

 

Filed Under: Supply Chain, Third-Party Logistics (3PL) Tagged With: 3pl, Cost of Capital, Freight Cost, Inventory Levels, Labor, Logistic Decisions, Near Richmond Marine Terminal, Near the Virginia Ports, Richmond, Riverside Logistics, Third Party Logistics, Transportation Solutions, VA, Virginia, Warehouse Space

July 26, 2022 by Logistics

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.

Filed Under: Supply Chain, Third-Party Logistics (3PL) Tagged With: Freight Cost, Richmond, Riverside Logistics, Supply Chain Problems, Virginia, Warehouse near Richmond Marine Terminal (RMT), Warehouses near Ports of Virginia

May 23, 2022 by Logistics

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!

 

Filed Under: Supply Chain, Third-Party Logistics (3PL), Transportation News Tagged With: Diesel Fuel Cost, Freight Choices, Freight Cost, How does the price of a barrel of oil affect your freight cost?, Richmond, Riverside Logistics, Supply Chain Cost, Transportation Cost, VA, Virginia, Warehouse

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