Driving Up Costs

Escalating fuel prices, HOS and driver shortages are placing a tremendous amount of pressure on shippers, according to GMA’s survey.


"This is certainly an interesting time to be in logistics," says Pat Johnson, the manager of logistics at Land O'Lakes, the dairy company based in Arden Hills, MN. "In addition to challenges like rising fuel prices, changes in hours-of-service regulations and driver shortages, there are rail constraints and years of carrier attrition. They are really straining capacity as well as budgets."

That's how the manager of logistics reacted to the findings in the Grocery Manufacturers Association's (GMA) fifth benchmark survey on logistics. The survey of 32 consumer products manufacturing companies was conducted by IBM Business Consulting Services in conjunction with GMA.

The survey found that in the last three years transportation costs have increased 23 percent to an average of $1.69 per mile. Transportation now accounts for 62 percent of all logistics costs. The bottom line is that higher than anticipated fuel prices have contributed greatly to the increasing cost of transportation.

Here are the key points:
- Transportation is driving up production costs in the food, beverage and consumer products industry;
- Changes to HOS regulations for truck drivers have had a domino effect. By limiting the average distance a truck driver can cover in a single day, carriers found it more difficult to retain enough drivers to meet demand and overall shipping capacity dropped; and
- More retailers are relying on manufacturers to address the challenges of moving freight today.

"For GMA member companies, responding to the needs of retail customers and reducing costs are constant goals. However, achieving these goals is more challenging than ever as transportation costs continue to escalate," says Karin Croft, GMA's senior director of industry affairs.

Says Karen Butner, associate partner, IBM Institute for Business Value, Armonk, NY, "Current margin pressures are severe. In an effort to improve customer service and reduce costs, we see many consumer products companies reducing the fixed costs and capital requirements of supply chain operations and moving to a more variable cost structure that can be controlled and managed on demand."

Commenting on the survey, Lisa Hebert, a transportation consultant with Chicago-based Accenture, says, "There is a tremendous amount of pressure on shippers today, both from a pricing standpoint and also from a service standpoint. There is a combination of factors-fuel surcharges, HOS regulations and driver shortages."

In addition to the carriers' issues with retaining enough good drivers, they are also limited by the net effect of the HOS rule change, according to John Murphy, director or product marketing for G-Log, a logistics service provider in Shelton, CT.

"The HOS rule changes, in effect, highlighted inefficiencies in the supply chain process by continuing the 'meter' for carriers while they were waiting and unloading," he explains. "This limited the number of available hours that truckers could drive that day and led to shortages in the network."

He used the example of a carrier that may have been able to make a trip from Pittsburgh to Philadelphia to Cherry Hill, NJ, in one day because the driver's work time stopped at each location while he was waiting at a loading dock.

"With the HOS rule changes, the waiting time counts against the drive time and the carrier is unable to service both deliveries in a single day," says Murphy. "This causes him to decline one of the two deliveries or increase the cost of the two-delivery stop movement because the driver has an overnight requirement to make the delivery in Cherry Hill."

According to the survey, consumer product companies are addressing increased costs, reduced capacity and retailers' concerns by:

1. Shifting to different transportation modes where possible.
"We are utilizing rail where we can and where it makes sense," reports Johnson of Land O' Lakes. "But car ordering lead times and longer rail transits do not lend themselves readily to our short order cycles, refrigerated products and limited shelf lives. Rail obviously has attractive cost tradeoffs, but in our experience rail capacity currently seems to be as constrained as it is for trucks."

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