Companies who completed an overhaul of their distribution network when prices of fuel were $2.00 - $2.25 a gallon with major trends toward globalization, might have designed the optimal supply chain and distribution network strategy - that strategy might no longer be appropriate for our new 2011 reality. Given trends such as rising oil prices and potential taxation and societal concerns about carbon footprint, changing course now might become extremely expensive, albeit necessary.
Certainly the rising cost of transportation is one issue on the minds of many executives, but there are other factors at play as well. Together these developments are challenging executives to respond appropriately to the environment, re-consider the investments they are making to distribute products efficiently, and, potentially, transform their distribution operations.
The drivers of change
Before defining your strategy, it is important to consider some of the key drivers behind the logistical pressures facing many companies today.
The primary driver is oil price fluctuations, particularly increases over the past months, which continue to be a significant and real concern. With demand for oil outpacing supply and instability throughout the Middle East and North Africa, the potential for $5 plus per-gallon gasoline is no longer a question of “if”, it’s simply a question of “when”. Furthermore, it is unlikely that prices will return to their previous levels without outside economic pressures – like a recession. Unfortunately, at that point reduced consumer spending would likely overshadow the impact of more favorable fuel costs. At any rate, companies should prepare for the fact that prices might never drop to what was considered an accepted level again.
The second driver is evolving regulation, particularly with respect to the sustainability movement and the potential cost of a company’s carbon footprint utilization. Public awareness and expectations are certainly an important consideration and some distribution organizations are being proactive in speaking to those interests (for example, the UPS television commercial referencing carbon footprint reduction). The prospect of taxation could add significant cost as well as the steps necessary to minimize tax effects and manage public perceptions with respect to sustainability. For example, on the one hand, the transportation mode with a smaller carbon footprint and lower fuel costs (rail and boat) could stand to gain, while road and air transportation suffer the consequences of rising oil prices. But conversion to rail and intermodal transportation can be very expensive, particularly if a company is not prepared for change or if their business/logistics model doesn’t apply to these transportation modes.
The third challenge driving organizations to change the way they do business is the relatively low supply of qualified drivers in comparison to growing demand. When demand exceeds supply, costs—in this case, salaries—go up, adding another significant budgetary concern on top of rising fuel prices.
Re-thinking transportation strategy
Oil prices and sustainability concerns alone may require reviewing and considering changes to distribution strategies; for example:
- Considering a “right balance” approach, rather than “just-in-time” of the past
- Slowing down your supply chain rather than trying to make things faster—adjusting it to account for transportation, carbon emissions, and working capital costs while keeping the same customer service level
- Implementing recycling/close-loop manufacturing (but recognize that this forces a focus on reverse logistics and adds transportation costs)
- Evaluating truck-load versus less-than-truck-load (LTL) shipping
- Determining whether the existing mega center strategy still makes more sense than a hub-and-spoke strategy
- Pursuing multi-shipper consolidation—a strategy that increases responsibility to the shipping company to maximize route and load planning
- Re-inventing packaging strategies to maximize cube location
- Assessing the benefits of asset collaboration, or shared facilities that enable multiple companies to benefit from infrastructure in a region while reducing transportation costs
- Revisiting long vehicle combination (LVC) regulation and utilization of fluvial and lake transport via bulk or containerized vessel
Of course, there is no “silver bullet” for dealing with these market dynamics. To minimize impact and optimize distribution strategies, your organization first needs to understand where it stands and whether its current transportation strategies are appropriate in light of the environment and the road ahead. This requires thorough assessment, accurate measurement, and a heavy dose of objectivity. One sure thing: business will change as oil, sustainability and workforce issues continue to play at the forefront of distribution - but as they say: that’s Logistics!