Fuel prices are high in absolute terms substantially impacting the game in terms of supply chain operations. Its adverse consequences are likely to affect logistics industry the most.
Last two decades has witnessed escalating fuel prices. World Bank report forecasts that soaring prices of fuel is one of the main reasons for hindering global economic recovery is 2011. This is causing spillover effects on other industries as well. Logistics industry is currently going through difficult times. Managers face the pressure of delivering goods with speed and flexibility, while cutting operating costs. Sky rocketing fuel prices, reductions in economic activity, supply chain changes, and fluctuations in currency values are affecting the operations of industries.
Petrol prices have risen drastically all over the world, with every country blaming one another. US blamed Egypt for its political unrest causing an increase of 3.1 cent per gallon within a span of seven days. Japan blamed increasing crude oil prices to affect its increase at the pump.
Impact in the Logistics Industry:
Fuel costs account for almost 50 60% of the total logistics costs. Fuel prices are impacted by excise rates. Average impact of fuel on road transportation is around 30% of the total costs. A 10% increase in the price of crude oil would cause a 1% increase in the transportation costs.
At some point of time, all trucks would be facing the situation wherein it will have to run empty while dropping one load, and running to pick up the other. Some carriers manage this situation effectively by optimizing their customers shipping, and delivery points. Some others have enough customer diversification that, they have many loads to choose from, and optimize. All carriers will have to pay for the fuel they use for the miles they run empty.
World Shipping Councils data states that, 90% of the global trade is seaborne, and approximately $4 trillion worth of goods are transported through sea every year. On an average, big ships burn around 320 tons of fuel per day when travelling at full speed. Currently, container ships are sailing at the slowest speed to cover up the fuel costs. This has resulted in driving up freight rates, and shares of ship builders.
Generally to tackle the pressure of rising costs, companies raise their service fees. But, this would not be preferred currently, as economy is just getting rebound. Businesses can adopt alternate strategies so as to minimize the effect of fuel price hikes. Strategies such as undertaking production in the customer plants, postponement of product finalization, increasing product density, exchanging merchandise with competitors so as to minimize the need for transportation can be adopted thereby reducing the amount of money spent on transportation. Companies can also renew their vehicles, and optimize their routes.
Redesigning the logistics network with emphasis on minimizing transportation costs has the probability to giving either positive or negative results. Adopting companies must evaluate the trade-offs between the distribution points, and assess the benefits of doing business with smaller distribution centers.
1) Data source: fintrend.com