The country’s business logistics costs increased 22% during the full year 2021 to a level not seen since 2011. In an economy that grew by 5.7% that is bad news for many companies. In fact, the pain was shared by all shippers who pay to move product because all varieties of transportation – parcel, less than truckload, truckload, rail, and air – all experienced double-digit cost increases. Especially noteworthy were private and dedicated trucking – companies operating their own trucking operations or contracting with someone else to do that for them. The reason for this major uptick in expenditures was not related to inefficiency but rather to many more shippers trying to get better control over their own transportation The other hot spot was parcel freight costs which increased by 15% during the year. Impacted by continued strong ecommerce growth, parcel freight costs have grown faster than any other sector averaging over 11% annual increase over the past five years.
Factors such as strong demand for transportation services, inability of service providers to increase supply due to lack of drivers and dock workers and high fuel costs have pushed freight costs higher; there also appears to be no reason to expect any relief in the near future. This means that shippers should plan for continued high freight cost for at least the rest of 2022 and well into 2023. Reality is that higher interest rates which are already here and a cooling economy which appears to be coming will put the most cost pressure seen in many years on all supply chains; since the 50 basis point interest rate increase is the largest in USA since 2000 this will be a new phenomenon for many current supply chain leaders who have never worked in an environment of rising interest rates.
So what we project going forward is that logistics costs will stabilize but will not experience deflation while service levels will improve to more reliable performance as sales cool in many sectors. We expect that parcel, less than truckload, and rail carriers can make higher rates hold due to low competition. Ocean carriers have such high fixed cost that they will cut rates for more business – this is already evident as import rates area declining. The bottom line is that everyone must get used to higher level of logistics costs. A return to logistics costs at 7.5% of GDP is unlikely…it is much more likely that costs will go higher than stay flat.
So what should shippers do to combat these high freight costs? Here are a few ideas:
- Use the fewest service providers possible. Too many companies with relatively few daily shipments further damage themselves by splitting that volume among a handful of truckers leaving them with little or no leverage with any trucking company.
- Use the services of a freight broker which can usually get lower rates because of higher shipment volume.
- Join a shipper’s association which is a non-profit group buying consortium. There aren’t many shipper’s association left in USA – many have become brokers – but they are helpful to small and medium sized firms.
Jack Ampuja has worked in corporate logistics for five Fortune 500 firms serving as Director of Logistics for a company that did business in 140 countries and then as vice president at two international firms. In his last corporate position with Fisher Scientific Jack led a $300 million division with 800 employees. For the past 20 years Jack has headed Supply Chain Optimizers a consulting firm which helps clients such as Walmart, Walt Disney and Office Depot attain lower logistics costs. Jack also teaches logistics in the MBA programs of two universities: in person for Niagara University and online for the University of Massachusetts.
