After 10 years of a steady upward trend followed by a sharp increase in fuel prices, European Logistics Service Providers are understandably feeling under siege. The price of diesel per litre has increased substantially since 2003, more than doubling in some Eurozone countries, whilst Logistics Service Providers (LSPs) have at the same time been under sustained pressure from their customers to lower rates. Is it therefore possible to counteract the rising cost of fuel while continuing to offer a competitive service and not effect profit margins? Andrew Dalziel, VP of Product Marketing at Kewill, investigates.
Duty on fuel remains a highly charged political issue, with significant differences in policies and levies between Eurozone countries, indicating that the cost of fuel will remain high for the foreseeable future. High fuel prices, against a backdrop of continued economic volatility across the Eurozone and beyond, coupled with rising inflation and labour costs, add up to a climate of uncertainty for an industry where reputations – and profits – rest on delivering reliably, at as low a cost as possible. LSPs are therefore facing the ongoing challenge of maintaining margins as operating costs escalate and competitive pressures push rates downwards.
Pressure from all sides
Retailers and manufacturers are also feeling the pinch from pressurised consumers, whose disposable incomes are dwindling as rising fuel prices drive inflation upwards, resulting in them spending less and demanding more competitive retail prices. Consumers today are more likely to shop around all available channels to get what they want at the lowest cost, while expecting immediate availability.
With no choice but to respond to consumer demand for lower prices, retailers and manufacturers are turning the pressure on LSPs to offer added value at lower rates, resulting in a more competitive marketplace with continued pressure to reduce prices. The problem is therefore that existing contracts are becoming less profitable, with renewals and new business even more hard-fought than ever, with LSPs increasingly looking for greater efficiencies and to diversify their services in order to claw back profits.
Increasing pressure, decreasing returns
In recent years, LSPs have generated solid, recurring revenues on fixed term contracts with retailers and manufacturers alike, by providing outsourced logistics services. Although margins were increasingly tight and competition always high, there was often good, regular money to be made on these contracts which are awarded by the majority of major companies who have found it more effective to outsource their logistics provision.
However, fuel price volatility has meant that many contracts have become significantly less profitable over the recent term, and economic volatility has led to consolidation, leaving a smaller pool of customers who typically want more value and lower rates at contract renewal. With negotiations often commencing well in advance of contract expiry, and fuel surcharge formulas providing only limited security, it is increasingly difficult for LSPs to predict fuel prices in the short to medium term and agree competitive rates that deliver a profit over the term of the contract.
LSPs are increasingly questioning the value of some of their contracts and reviewing their customers for profitability. As logistics costs increase, margins shrink, and customers are increasingly finding that, with fewer providers to choose from due to market consolidation, they are often not able to negotiate the very low rates seen in previous years, as LSPs seek to divest themselves of unprofitable contracts and ensure profit on new ones. In a competitive market with a limited number of contracts available, LSP companies are looking for structures, processes and technology that can help them make profitable contracts that look unattractive in today’s market.
Offshore to near shore
Volatile fuel prices are also contributing to changing trends in sourcing, as increased prices make the decision to manufacture closer to home, or simply customise and package goods close to home that have been produced and shipped in from further afield locations. What once were significant labour cost savings during the production process are now often annulled by the soaring costs of transporting goods to the Eurozone via air and sea. Changing sourcing practices are providing both challenges and opportunities for LSPs, who are forging closer relationships with freight forwarders and in some cases offering added value services around freight forwarding, warehousing and final production (for example, assembly and/or packaging) at the ‘near shore’ stage.
Maximising haulage efficiency
Less than truck load, return load and use of multi-modal transport are now more important than ever as manufacturers and retailers seek to drive down logistics costs to the bare minimum, selecting the mode and route of transport that costs the least, with LSPs investigating ways to help them.
Common ways that LSPs can maximise haulage efficiency include groupage or consolidation, which involves several individual loads being bundled together to fill a whole truck for all or parts of a trip. Although more hassle for the LSP to arrange than a single destination shipment, the payback is a significantly improved return on investment in terms of the fuel costs and man hours required to undertake the delivery.
LSPs are now more focused than ever on transport efficiency, scheduling return loads in-line with deliveries to avoid running ‘empty miles’ with no goods on-board on the return legs of trips.
Larger LSPs are often able to utilise both groupage and return loads through their own jobs and networks, however there are many well-established online carrier networks set up specifically to make the process easier. The challenge is in the planning, which becomes more complex as more customers, vehicles and shipments need to be managed.
The role of effective IT
As fuel inflation continues to tighten margins on an already highly price competitive logistics market, warehouse and transportation resource utilisation is becoming ever more critical. Protecting and boosting margins depends on systems and processes that enable LSPs to guarantee their customers service levels of 99.8% or greater, and no damage.
Technology is increasingly seen as a driver to greater efficiency and LSPs are coming under pressure to have integrated systems to support core management functions, including warehousing, transport planning, transport execution and financial settlement, to drive down back end costs and ensure delivery against customer promises across multiple channels.
Key areas where effective IT can help to protect margins and mitigate rising fuel costs include :
New contract set-up – 3&4PL providers are under pressure to get new customers up and running quickly. With retail contracts typically only lasting 3-4 years and the need to provide high customer delivery performance while being competitive on price, it’s imperative that the LSP not only delivers on the agreement but promptly gets the service functioning to ensure customer KPIs are met and start generating a profit from early on in the relationship.
Integration – LSPs need to be able to easily and quickly integrate their business critical IT systems with those of their customers and partners, to give better visibility of the status of orders and the location of customer stock, as well as enhance business agility. IT and centralised data can help enable the logistics service provider to respond more quickly and efficiently to their customers‘ needs.
Maximise efficiency – An Integrated Warehouse Management System (WMS) and Transport Management System (TMS) allows automatic optimisation of vehicle fill, facilitating groupage and return loads. Having the knowledge communicated between the systems and real time data facilitates enables this type of precise vehicle fill, saving on journeys made and reducing fuel costs. Integrated solutions with maximum automation provide better visibility into logistics and better control of transportation networks through track and trace functionality to determine the location of a shipment wherever it resides in the supply chain.
Lower implementation costs – Hosted or SaaS (Software as a Service) models are increasingly offering a faster, more cost-effective implementation option. Importantly, these models allow logistics companies to focus on their core competencies whilst the vendor manages the IT system, effectively allowing them to outsource their non-core competencies.
Remove manual processes – While the majority of LSPs now employ web-based order management systems to streamline the way that information is exchanged, both internally and externally, there are often a series of manual processes between systems and third parties, leading to delays, errors, higher costs and ultimately a loss of customers.
Although LSPs cannot themselves influence fuel prices, focusing on the above areas can help to significantly reduce fuel consumption and lower operating costs through better efficiency, helping to improve margins.