The cost of fuel which has been on the rise even since the Russia-Ukraine war has now become an ever-growing headache for the freight forwarding industry. The supply chain sector is closely interlinked with the fuel industry as practically all commodities’ supply chain is impacted by it. No matter if the product is moving from a supplier to the distributor and then to the retailer, the net fuel expenses are an important determining factor of its cost. In today’s post, we are going to take an in-depth look at the impact of the ever-increasing fuel costs on the transportation and logistics sector.
Implications of increasing fuel prices on the freight forwarding industry
Increased freight expenses
When the cost of fuel skyrockets, the carriers automatically increase the freight rates to avoid incurring losses. The rising fuel expenses impact the entire logistics industry as when the freight rates go up, the forwarders also charge more to move the cargo and make up for the increased costs. Consequently, the importers/exporters also end up spending additional money to cope with the extra expenses.
Increased cost of commodities
The impact of the cost of fuel goes beyond logistics, as it affects the entire supply chain ecosystem. Simply put, the rising freight rates translate to a higher price for the products. This cost tends to get even higher if the products are time-sensitive.
Changes in the mode of transportation
The fuel charge has made certain modes of transportation such as air freight more expensive. As a result, many small businesses are resorting to sea freight and rail freight to avoid exorbitant air freight rates. This in turn is resulting in additional demand for space and eventually delays.
Impact on the air freight sector
The fuel expenses have come up as a significant pain point for the air freight industry all through this year. Nevertheless, the air freight forwarders and the cargo carriers are tackling the challenge very competently. Several air cargo carriers are implementing fuel surcharges to cope with the price hike. Emirates SkyCargo has stated that presently the fuel price is constituting their largest expense. In the words of their Vice President Mr. Matthew Scott, “Fuel costs have more than doubled compared to the same period last year, and….. it is currently the largest component of our operating costs.” DHL Express has also implemented a fuel surcharge. Additionally, they are also investing in infrastructure and sustainability to counter the problems.
Impact on the sea freight sector
The increased consumer demand coupled with low container availability, port congestion, and equipment shortage already resulted in a substantial hike in the ocean freight shipping rates. Presently, the increased price of fuel has added to the existing problem. Additionally demands in the container shipping industry have reached an all-time high since many companies are now looking forward to moving their cargo via ocean freight. Just like the air freight sector, many ocean carriers are also implementing surcharges as fuel constitutes a vast majority of their net transportation expenses.
Some carriers are also trying to counter the high prices by moving the ships at a slower speed. By reducing the speed of the vessels to 15 knots instead of 22 knots, they are seeking to lower the fuel consumption. However, this strategy to mitigate the rising expenses also has its drawbacks. It is leading to an enormously long shipping time which often tends to become even longer because of the congestion in the ports.
Impact on the rail freight sector
The rise in petrol and diesel prices has prompted many players in the freight forwarding industry to start exploring the potential of rail freight shipping. Freight forwarding companies these days are often going for a combination of rail, ocean, and trucks to move their shipments in the most cost-effective way. Trains are four times more fuel efficient than trucks and therefore offer a cheaper freight rate than trucking. Moreover, freight trains can move above a ton of cargo to a distance of 470 miles on a single gallon of diesel. Therefore, trains are coming up as the go-to mode of domestic freight transportation because of the cost-efficiency it offers.
Impact on trucking
Trucking is hands down the most popular mode of transportation for domestic shipments all around the world. In the USA alone it accounts for 72% of all freight. However, this sector is also having to contend with several difficulties including driver shortage, faster shipping expectations, and more recently rising fuel costs. In addition, the extra fuel costs are also taking a toll on their profit margin as the trucks are required to run empty cargo for several miles after completing a delivery. To ensure a profit in the face of these problems most trucking companies internationally have applied a standard fuel surcharge.
How the freight forwarding companies can safeguard themselves from the rising fuel costs
Rising fuel costs are surely not a challenge that is alien to the freight forwarding industry. There are several measures that the transportation and logistics sector can take to safeguard itself from the impact of the increasing fuel costs. To begin with, small and mid-sized logistics companies should start reducing the number of carriers and consolidate their supply chain requirements through single sourcing. This will leave some space for price negotiation and most carriers provide discounted price packages for greater volumes.
Road freight companies have the option of investing in route planning software for achieving cost efficiency. Rather than worrying about the price per litre of diesel, trucking companies need to focus on the number of tasks that can be performed per litre. For example, the use of route planning software can help trucking companies with fuel expense mitigation. These software effectively plan routes that optimize operations and result in minimal fuel expenditure. Some of the best route planning software in the market can even recommend different routes according to the level of fuel cost. Moreover, they can also adjust the delivery plan enroute in accordance with the traffic and weather condition thus lowering the net delivery expenses, wait time, fuel consumption, and driver time.