Whether you believe the peak oil theory or not, the cost of crude oil continues to rise causing a major affect on a variety of supply chain costs. Last year, I listened to an economist talk about the influence of rising oil prices, and how it will change the logistics industry as we’ve known it in recent years. At the time I was skeptical of his predictions. Today with gasoline prices at $4.15 per gallon and rising, I’m starting to believe what he had to say. Here’s why…….
Since the peak oil lecture, I’ve met with several business leaders from a variety of companies across the United States. In a very nonchalant manner, I have asked them how rising fuel costs have affected their business. I also asked them what initiatives have been put in place to maintain their cost of goods. Here is what these clients recommended:
1. Optimize Transportation Management & Methods —
- An increasing number of logistics managers are implementing manifest software solutions that can shop for the least expensive carriers based on the most favorable rates available. Don’t ship your products via a single carrier, such as UPS or FedEx. Use both of them and even a third or fourth provider to get the best prices.
- Find new methods to cube out a trailer, rail car, or shipping container. Custom crates or containers are being used to provide increased stacking of odd shaped items. As an example, for years conveyor manufacturers would ship their equipment on long crates one level high until the floor of a semi-trailer was full, leaving a great deal of vertical space. Today, through creative measures of blocking and stacking loads, an entire trailer can be shipped with double the product. And, because we are more concerned about being green, the blocking and shipping crates are being returned to the manufacturer for the next shipment.
- For soft goods such as apparel, large vacuum-packed plastic bags can be used to minimize space prior to being palletized or containerized.
- Plan further in advance and ship via the least expensive method. It seems that railroads are a strong consideration when cross country hauls are needed. If planned properly, it can save a lot of money.
2. Reduce Outsourcing Products (that can be made by your own company) —
- I recently visited a large U.S. manufacturer of household rugs and flooring. During my visit, I learned that the raw materials (cotton, yarn, etc.) that make up their rugs were being imported from other countries. Based on rising transportation costs, this manufacturer decided to produce these commodities on a local basis. Yes, they have brought the production of a commodity product back to the United States. Even better news, they are more competitive than 100% imported products from Indonesia, India, Vietnam, and China. More good news, Wal-Mart, Target, and others are buying more of their products, which has caused their overall production to increase more than 30% in the past 3 months.
- In essence, if you can remove costs from any part of your value stream, look to provide this service yourself.
3. Locate Business Centers Closest to Clients —
- Another U.S. manufacturer that moved its production to Mexico a few years ago just announced its plan to move production back to the U.S. Even though labor costs may be lower, overall quality and productivity were less than expected. Add that to increasing logistics costs and it makes perfect sense why this company is moving its operation closer to its clients. This is also great news since the manufacturer will be creating thousands of new production jobs right here in the U.S.
- Another interesting indicator is the industrial real estate market. A few years ago large distributors were building massive distribution centers in the range of 750,000 to 1 million square feet. The idea was to have fewer, but larger DC’s. The trend now is to build smaller DC’s, but to place them closer to customers. Although the number of speculative buildings being built are few, both these and build-to-suit owners are considering much smaller square footage facilities than in years past. This is a direct indication of companies intending to reduce transportation costs by placing their products closest to the customer.
How will you reduce supply chain costs? I’d like to hear your ideas.