Transportation costs are insane and they are impacting the distribution business
Transportation costs are one of the components of the cost of products as we explained in a recent post about vendor selection criteria. The pandemic that brought entire economies to their knees in 2020 triggered a series of factors that had resulted in a huge increase in transportation costs. In this article we look at why that happened, the impact it had on the US, and review the actions that some companies have taken to address it.
Where do products come from in the US?
This graph shows the growth in the U.S. import volume of trade goods from all countries from 1987 to 2020. In 2020, U.S. imports from the rest of the world amounted to approximately 2.3 trillion U.S. dollars. About 30% of that volume comes from China.
In 2020 Asian countries accounted for 45% of the imports vs 32% from North America (Canada and Mexico) and 23% from Europe as shown below.
Transportation costs statistics
Shipping is the backbone of world trade; it is estimated that around 80 percent of all goods are transported by sea. In terms of value, the global maritime container trade is estimated to account for around 60% of all seaborne trade, valued at around 14 trillion U.S. dollars in 2019. Between 1980 and 2020, the deadweight tonnage of container ships has grown from about 11 million metric tons to around 275 million metric tons.
The figure below shows the Global container freight index for the last two years. There has been a global average 10-fold increase in prices. For the Asia-USA Pacific Coast route, the increase is twice as much.
Why have transportation costs increased so much?
Here are some of the reasons why freight costs have risen so much since the pandemic and why they will remain that way for the near future.
- Lock-down restrictions slowing down global trade
Health concerns and lockdown restrictions caused the market to depend heavily on e-commerce. Online retail activity increased immensely, and it led to a much higher demand for retail goods. This factor did not cause a decrease in purchases from retailers and distributors but collapsed the ground delivery structure. Companies like FedEx and UPS have raised their tariffs and are trying to expand their structure to cope with this situation, but it will take some time.
- The trade imbalance between China and the West
A trade imbalance is nothing new (especially between China and the US), but global Chinese exports soared 60.6% over the first two months of 2021 when a lot of Western economies started to recover from the pandemic and demand for Chinese goods skyrocketed. China’s global trade surplus reached 103.25 billion early on in 2021, whereas it recorded a deficit of $7.21 the previous year. This difference is also reflected in the number of containers going back and forth since Chinese exports are typically high-value products, while US exports are relatively lower-value agricultural products such as wheat and soybeans. For example, China ships three containers filled with inexpensive products, such as cell phones, to the United States. In turn, those containers are trucked inland to be filled with soybeans and shipped back to China. The problem is that China does not really need three full containers of soybeans back, but one. This means that either they leave two empty containers, causing a shortage of containers, or they ship them back, which increases the cost of the container and thus increases transportation costs for future shipments.
- Reduced blank sailings will help ease capacity constraints
Globally, capacity on major shipping lanes has recovered to levels prior to the major lockdowns in 2020, although blank sailings (canceled port calls) continued to cut 10% of scheduled capacity through the first quarter. There are signs of improvement this quarter, which in current plans will average 4%. But cancellations have partly been a response to delays, therefore, while the system remains congested, shipping capacity may continue to be removed from the system on short notice, resulting in higher transportation costs .
- Port congestion and closures keep creating delays
As the link between canceled sailings and delays suggests, congestion is part of the problem. Shipping performance in 2021 has picked up where 2020 left off, in terms of lower rates of the vessel meeting schedule, and increased average delays for delayed vessels. There are some signs that average performance will start to improve as the share of vessels reaching their destinations on time stopped sliding in April, and average delays improved. But the overall performance is still the lowest in ten years of records
- Big shipping firms taking advantage
The laws of the market are always in place: if demand exceeds the offer then prices increase. Some carriers have raised prices beyond the actual impact of container shortages and rising costs.
It is a miracle that the increase in freight costs has not yet been fully reflected in prices. But sooner rather than later it will. These are some of the possible impacts.
Often dismissed as having a negligible impact on inflation because they were a small part of overall spending, rising shipping costs are now forcing some economists to pay a little more attention to them. Although still seen as a relatively minor input, it is estimated that a 205% increase in container shipping costs over the past year could raise producer prices by as much as 2%. But shippers of lower-value products such as household items, toys, promotional articles, or t-shirts have seen freight costs increase from around 5% of their sourcing costs to more than 20%.
Shortage of products:
Freight costs are more painful for companies that move low-value items like clothes and diapers. In many cases, the transportation costs are higher than the cost of the product, making it impossible to compete. Faced with this fact, companies are either discontinuing products or restricting their marketing to some areas.
What can be done?
At the retail level, vendors are faced with three choices: halt trade, raise prices or absorb the cost to pass it on later, all of which would effectively mean more expensive goods and fewer sales.
Smaller product presentation
In reality, most consumers do not take a look at the wording on the packages of the products they are purchasing. Therefore, a common practice among manufacturers to deal with cost increases is to decrease the content of the product in the package. There are two ways to do it: keep the same box or bag and simply change the quantity on the labels, or make a smaller bag. Either way, the consumer will end up paying more per unit.
Plan Your Shipments Early
With freight costs going through the roof, it’s more important than ever to book your cargo early and have a well-planned procurement process. Consider booking your shipments weeks or even months ahead. Avoid booking shipments during peak seasons and holidays.
Also, make a solid shipping plan so you are always on top of your inventory and never run out of stock.
Work With a Reliable Freight Forwarder
Admit it or not, it’s not so much what you can do, but what your freight forwarding company can do for you. Be sure to work with a reliable forwarding company. The largest and most established have much more resources at their disposal.
Also, make sure to work with companies that communicate with you and are transparent about your shipments
Consider Your Alternatives
As of this writing, there is only a marginal price difference between a 20′ container and a 40′ container. If you can, order more products and ship a 40′ container to lower your per-unit costs. LCL in fact is becoming a more viable option for items under 25 CBM.
I hope this article has been helpful. I will continue to publish information related to Warehouse Management, distribution practices and trends, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, register to keep you updated on future articles.
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