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How Shippers Must Move Into 2012

Jan. 18, 2012
How Shippers Must Move Into 2012 with Transportation Strategies

Although leading indicators point to a continuing but very slow economic recovery in the United States, the U.S. stock market has been roiled by the twin forces of political gridlock in both Washington, D.C., and the Euro-zone. The upcoming 2012 U.S. presidential election threatens to paralyze any financial stimulus at home while Euro-zone economic turmoil continues over a possible Greek default, and with the likelihood that financial unrest could domino into Ireland, Italy, Spain and Portugal, all these things make for a very uncertain global economy.

Although the domestic economy has seen GDP growth over the last seven quarters, the U.S. economy is far from thriving and companies continue to search for opportunities to reduce costs while minimally impacting service levels.

Intermodal Opportunity

Even though fuel prices have come down significantly in recent months, the price of crude is still hovering in the $100 a barrel range. As was the trend in 2011, shippers are increasingly looking towards utilizing intermodal movements (in this case a combination of trucking and railroad) to better manage costs. Shipping goods via train as opposed to truck has a huge impact on overall fuel costs. A gallon of diesel fuel on the railroads goes roughly four times the distance a similar amount of fuel uses on the roads.

Capacity constraints prevented more volume from moving from truck to rail in 2011; however, railroad capacity is expected to grow by over 15% in 2012. The big four railroads have been investing heavily in infrastructure and are positioning themselves to take advantage of these recent trends.

Importers and exporters will continue to benefit from an influx of capacity and soft demand in the ocean freight world. Savvy and prepared shippers should steer away from more costly air freight shipments and capitalize on the advantageous pricing environment on the seas. Capacity is expected to increase by almost 10% in 2012 as over 230 new ships are expected to be delivered. Over one-fourth of these new ships are massive and will have container capacities in excess of 10,000 TEUs (twenty-foot equivalent units) per ship.

Postal Service Challenges

The United States Postal Service (USPS) continues to dominate the headlines moving into 2012 and just last month announced drastic cost reduction measures that are sure to impact shippers of all sizes. If approved, these changes will result in large cuts to both the number of mail processing facilities and number of postal employees.

They proposed shuttering nearly half of the 500 processing centers as soon as March 2012. However one day after the announcement, a group of 21 senators from mostly rural states (rural states stand to be the most heavily impacted by the changes) signed a letter to Congressional leaders requesting they add language to legislation that would halt closings for six months.

By some estimates, the USPS is projected to lose over $14 billion in 2012. Nearly 100,000 postal employees may be affected by the reductions in workforce. The USPS also announced that it will no longer deliver first class mail in one day, a major slowdown for many mail recipients. Almost 45% of first class mail is currently delivered in one day.

The USPS had previously announced plans to move to a five-day delivery and although it still lacks final Congressional approval, the plan could go into effect in fiscal year 2011. Despite its unpopularity among unions and many Democrats, the plan has won the support of President Obama and could generate as much as $3.1 billion in annual savings.

Mail will not be delivered to street addresses on Saturday, and mail will not be collected from blue street collection boxes or post offices on Saturday. Also, there will be no Saturday pickup of mail from homes and businesses. Express mail will continue to be delivered six days a week. The new delivery schedule will have a profound effect on organizations that rely on USPS shipping or a combination of private shipping and USPS shipping (hybrid products such as UPS Sureport and FedEx Smartpost).

Shipping Legislation

Legal issues will continue to play a significant role across many modes of transportation in 2012. In 2011, both the U.S. Federal Maritime Commission and the European Commission investigated price collusion among U.S. and internationally-based ocean shipping lines. European and Asian lines are under the gun for violating antitrust rules while U.S. shippers have been charged with fixing prices and increasing fuel surcharges on shipping lanes to Puerto Rico and on trans-Pacific routes.

Railroads have been targeted too. In particular, Union Pacific and Burlington Northern Santa Fe are being sued by Oxbow Mining, which claims the railroads conspired to raise prices on customers like the Colorado coal mine that Oxbow runs. While Congress has discussed regulating railroad pricing more closely, it has not approved any new rules. Railroads maintain that they must charge higher rates to cover their costs and reinvest in their costly track networks.

Parcel shippers UPS and FedEx have not been exempt from pricing collusion charges either. In 2011, parcel shipping consultant AFMS LLC filed a lawsuit against both companies alleging that they conspired to fix prices for parcel shipments by shutting third parties out of rate negotiations. The first hearing on the case is set for January 13, 2012.

Oil Prices

The price of fuel also continues to be a major theme as we move into 2012. As of December 7, 2011, fuel surcharges on full truckload were hovering at 60% and above 30% for less-than-truckload, over a 20% increase when compared to the same time period the previous year. International heavyweight air freight fuel surcharges continue to be a burden, where in many cases the shipment charges related to fuel exceed the base transportation charges.

Expect the Unexpected

Planning for the un-planned is also crucial in managing supply chains as we continue through 2012. From tsunamis to earthquakes to debilitating snow and wind storms, having contingency plans in place and multiple suppliers in different regions of the world (or even regions of the U.S.) will be essential. Scientists in Iceland are closely monitoring the mighty Katla volcano and project that an eruption could dwarf the impact of the 2010 Eyjafjallajokull eruption. The 2010 eruption crippled air freight shipments out of Europe for weeks.

Many companies are still reeling from the after effects of the March 2011 Japanese tsunami. The region produces almost 25% of the world’s silicon wafer supply and organizations that sole-sourced from suppliers in this area were devastated. The disaster has caused many multi-national organizations to re-think their sourcing strategies and ensure they have back-up solutions in multiple locations across the globe.

Today’s supply chain organizations need more aggressive spend management to reduce costs and mitigate risk in shipping. Traditional tactics like invoice auditing and refund recovery are great ways to cut shipping costs in a stable market, but the complexity of today’s shipping environment requires a deeper understanding of how to lessen the impact of industrial, political and economic forces on corporate spending.

John Haber is the founder and CEO of Atlanta-based Spend Management Experts, which provides retailers, manufacturers and suppliers with technology and services to manage shipping costs.

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