Supply Chain Issues: Transportation Cost

Supply chains constantly face several challenges, including fluctuating demand, inventory shortages, and port congestion. Among these, rising transportation costs have emerged as a significant concern. High fuel prices, shortage of drivers, and new regulations are increasingly complicating supply chain management for businesses. Understanding the impact of these costs on supply chains and their implications for procurement is crucial. Let’s examine how these costs affect supply chains and what can be done to address them.

Transportation Cost – A Major Concern for Supply Chains

Transportation cost is the expenses related to moving goods and materials. These include costs for raw materials, driver wages, employee salaries, vehicle maintenance, vehicle operations, and transporting finished products. Some transportation costs are fixed, while others vary. Transportation costs can be divided into several categories based on different aspects of the transportation process:

• Cost of Goods Sold (COGS)

• Efficiency and Reliability

• Global Economic Impact

Types of Transportation Costs

Direct Transportation Costs

Direct transportation costs are related to moving goods from one place to another. Direct transport costs include fuel, vehicle maintenance, driver wages, tolls, and any fees charged by transportation providers. In urban areas, increased fuel consumption can significantly impact these costs due to traffic congestion and frequent stops. Additionally, navigating through dense urban areas can lead to higher maintenance costs for delivery vehicles due to wear and tear from frequent starting and stopping.

Freight Charges

Freight charges are the costs carriers or logistics providers charge for transporting goods. These charges depend on weight, volume, distance, and the transportation mode (e.g., truck, rail, air or sea). Freight charges may also cover additional costs, such as insurance, tracking or special handling.

Packaging Costs

Packaging costs involve expenses for packaging materials, such as boxes, crates, pallets and protective materials. Proper packaging ensures the safety of goods during transportation but can add to the overall transport costs.

Warehousing and Storage Costs

Warehousing and storage costs include expenses for storing goods before or after transportation. This covers rent or lease for warehouse space, labour costs for handling and inventory management, security measures, and any additional services needed, such as temperature-controlled storage. Managing a distribution centre can present various challenges, including maintaining optimal inventory levels, ensuring efficient space utilisation, and handling the associated costs of security measures and specialised storage requirements.

Customs Duties

For international trade, customs and duties are essential. These costs comprise import and export duties, customs clearance fees, taxes, and other charges by customs authorities. Complying with customs regulations and handling necessary documentation can incur extra expenses.

Insurance Costs

Insurance costs protect goods during transportation against loss, damage, theft or other risks. Businesses may choose cargo or liability insurance to cover potential financial losses related to transportation incidents.

Administrative and Documentation Costs

These costs involve expenses related to paperwork, documentation and regulatory compliance. This includes fees for preparing shipping documents, permits, customs declarations, and any administrative processes involved in transportation.

Inventory Carrying Costs

While not directly related to transportation costs, inventory carrying costs are influenced by transportation lead times. These costs include expenses for holding inventory, such as storage costs, depreciation, obsolescence, insurance, and financing charges. Efficient transportation helps reduce lead times and lower inventory carrying costs.

Factors Affecting Transportation Costs

• Fuel Costs: Fuel costs play a significant role in determining transportation costs. When oil prices fluctuate, it can cause fuel surcharges to change or alter the overall rates that carriers provide. This means that even a tiny shift in fuel prices can lead to significant variations in transportation cost.

• Labour Costs: The wages paid to drivers and other transportation staff are significant. Efficient scheduling and better route planning can lower these costs by reducing overtime and improving productivity.

• Shipment and Freight Rates: In trucking, shipments are given a freight class based on how dense, valuable or challenging they are to handle. This freight class determines the rates and charges for the shipment, which affects the overall transportation costs.

• Geographical Factors: Terrain, road conditions, accessibility, and distance from transportation hubs can influence transportation costs. Remote or difficult-to-reach locations may cost more due to poor infrastructure, long distances or travel times, or the need for specialised transport infrastructure and services. The transport sector in such areas faces unique challenges that can significantly impact operational effectiveness and costs. Additionally, environmental impacts must be considered, as transporting goods over longer distances can increase fuel consumption and emissions. Effective management of these geographical factors is crucial for promoting economic activities and ensuring sustainable procurement and transportation solutions.

While some factors, like fuel prices, are beyond your control, there are other areas where you can work to minimise high transportation costs. By focusing on these factors, you can limit expenses without hurting profitability.

Understanding the Impact of Transportation Cost

Transportation costs are crucial for businesses because they can influence pricing and operations. High transportation costs can increase product prices, potentially reducing consumer demand and revenue. Additionally, higher costs for obtaining supplies or delivering products can strain supplier and customer relationships, especially if a company struggles to absorb these costs.

When shipping costs are high, companies might reduce the frequency of orders but increase inventory levels to save on shipping expenses. While this can lower shipping costs per item, storage expenses for the additional inventory increase. Furthermore, fluctuating shipping costs make it difficult for companies to plan their finances accurately, as they cannot predict future expenditures.

Increased shipping costs can also disrupt delivery schedules, causing delays that impact production and overall efficiency. To mitigate these challenges, transportation companies must adopt new technologies, such as tracking systems and advanced delivery route planning.

In summary, transportation costs affect various aspects of a business, including pricing, inventory management, financial planning, and operational effectiveness. To remain competitive, businesses must manage these costs effectively and leverage technology to optimise their transportation systems.

Strategies for Reducing Transportation Costs

Effective management can significantly impact the ability to manage, track, and control transportation costs. By implementing strategic measures, transport companies can make transportation operations more efficient and cost-effective. Here are some strategies for cost reduction in transport planning:

• Negotiate with Suppliers
  Working closely with suppliers and other partners in the supply chain can help reduce costs, including sharing transportation costs, optimising order sizes, and coordinating shipments to lower transportation costs and improve efficiency

• Consolidate and Pool Shipments
  Delivery rates are set based on trip type, weight, distance and other factors. Consolidating company shipments is very beneficial. This strategy allows companies to pay less for larger shipments, resulting in fewer trips. Shifting from Full Truckload (FTL) to Less than Truckload (LTL) methods allows to achieve this.

  FTL means that your company books the entire shipment for your goods, even if the goods do not occupy the whole space. In comparison, LTL means the transportation of goods that do not require the entire truck space, allowing separate shipments to be transported in one truckload. Discounts on larger shipments are typical and can help you save costs.

• Enhance Supply Chain Visibility
  Improving visibility throughout the supply chain allows for better tracking and management of transportation activities. Investing in technologies such as GPS tracking, real-time data analytics, and SCM software can provide insights that help identify inefficiencies, optimise routes, and reduce delays, thereby lowering transport costs.

• Optimise Transportation Strategies
  Optimising transportation strategies involves selecting the most cost-effective methods and routes for shipping goods. These could include choosing intermodal transportation, leveraging backhaul opportunities, or adopting flexible routing options. Regularly reviewing and adjusting transportation strategies based on changing market conditions and operational efficiency needs can significantly reduce costs.

• Predictive Analysis
  Predictive analysis techniques can help anticipate future transportation costs and identify potential savings opportunities. By analysing historical data and market trends, businesses can try to forecast demand, optimise inventory levels, and plan more efficient transportation operations. Predictive analytics can also highlight patterns indicating rising costs and enable preemptive adjustments to avoid extra expenses.

• Incorporate Design for Supply Chain (DfSC) Principles
  Incorporating Design for Supply Chain (DfSC) principles involves designing your product with the supply chain in mind. This means considering how your product’s design will affect raw material costs, supplier locations, and the ease of manufacturing and delivering your product. Focusing on these areas early in the design process can make your supply chain more efficient and cost-effective.