Tips for Reducing Transportation Costs

Logistics service providers need to protect their margins by leveraging economies of scale through partnerships and networks

Larry Lewis
Larry Lewis

The logistics industry is shaping up for some radical changes in 2014 and logistics service providers (LSPs) today are faced with several challenges, including spiraling fuel prices, labor shortages and reduced inventories. All of these factors lead to increased transportation costs, which can create a huge issue for LSPs that operate on very small margins.

In order to be successful in today’s climate, LSPs need to protect their margins by leveraging economies of scale through partnerships and networks, and can benefit from taking a bigger share of supply chain profits through expanding the reach of their operations and offering value-added services. This article explores several ways that LSPs can reduce costs and protect their margins.

Fuel Prices

Fuel prices continue to rise and, according to industry reports, by 2020, the average price per barrel of oil will cost about $150, with much higher peaks possible. Energy savings willbe a major focus for LSPs worldwide, with activities that maximize haulage efficiency, such as groupage/consolidation and participation in logistics networks, becoming more important than ever before.

This will prompt LSPs to continue to experiment with green fuels and vehicle innovations, such as longer length trailers and better aerodynamics, with the overall aim of making vehicles more fuel efficient and driving down fuel consumption. Solar panels on the roofs of truck cabs and containers will become a relatively common sight in coming years. Many regions will begin to see road freight shift to rail over long cross-country routes to minimize fuel costs with the added benefit of reducing carbon dioxide (CO2) emissions.

Labor Costs

Despite the after-effects of the global economic downturn still being felt, LSPs throughout Europe, and in many parts of Asia and the U.S., are struggling to find skilled workers for their warehouses. This is a growing problem as birth rates fall in the West, and participation in further education, and cost of living and aspirations grow in developing countries. This leaves LSPs struggling to staff distribution centers with experienced, permanent workers and creates an issue for the supply chain as a whole.

The shortage of drivers and warehouse workers will also present a very real challenge to the logistics industry and may be a factor in driving up costs. Of greatest concern is the forecast increase in share of cost of labor for road transport, which is set to rise by up to 50 percent by 2025, according to various studies.

LSPs are adopting technology to deal with these challenges. For example, hardware, such as scanners and hand-held stock management devices linked to the warehouse management system (WMS)—which was originally introduced to improve efficiency of operations and provide more reliable visibility of stock within the warehouse—prove useful in managing a transient workforce of different nationalities, especially among the younger, more tech-savvy workforce.

LSPs are also benefitting from software and hardware that is equipped to handle multiple languages. LSPs all over the world that are experiencing economic-driven migration and the effects of skills shortages may benefit from this simple solution to a global supply chain problem.

Reduced Inventories

Retailers and manufacturers are looking to reduce their inventories in order to minimize their own costs by carrying less stock. Therefore, LSPs are under pressure to service distribution centers and stores with smaller, more frequent deliveries. This is driving them to fill loads across business sectors, and many are now seeking to enter into collaborative agreements with customers and competitors to maintain margins. Achieving flexibility and agility is even more critical.

LSPs are leveraging networks to address this issue more and more. For example, if a company has 500 trucks that service set routes on set days via distribution centers, it will be very difficult to ensure that the trucks are always full. But, if the company joins a truck network in which people can bid for or book spare space on a particular route or day, the company can make sure that the trucks are full for a greater percentage of the time. In order to successfully take advantage of shared networks, however, it is necessary to share data among the network’s members.

Integrated Systems

LSPs can significantly increase efficiencies, and therefore, reduce costs by integrating their own systems, including order management and finance. With an integrated, automated system, the data must only be entered once, leading to several benefits, including reduced processing costs and time. This also makes it possible to decrease the number of people needed in the process and can lessen the risk of manual errors (such as transposed numbers when re-entering). As the LSP integrates with customers and supply chain partners, such as sub-contractors, these benefits are compounded.

Integrated systems also provide a huge fringe benefit. If the right solution is in place, the integrated system can enable visibility across the organization and the supply chain.

In addition to investing in integrated systems, LSPs can benefit from other automation solutions. For example, tools such as radio frequency identification (RFID) scanning can eliminate processes by working with existing software. This provides another means of eliminating the need for re-processing, therefore preventing potential errors.

Cost Analysis

Another key factor for LSPs is a granular analysis of transportation costs. It is important to have an accurate recording of transportation costs—by route, by lane, by customer—in order to have visibility into where they are making and losing money, and to ensure sure each customer is billed accurately and costs are attributed correctly. Optimization packages can then help plan trips by ensuring that each truck is as full as possible, therefore saving fuel and labor costs.

The Outlook for LSPs in 2014

As economic factors such as fuel costs and labor shortages converge, LSPs will be faced with significant challenges in the coming year. However, LSPs that leverage technology solutions to gain visibility into their operations, analyze costs and work more efficiently, will have the opportunity to thrive in 2014 and beyond.