Supply and Demand's Effect on Freight Cost and How to Get By
It's no secret that shipping rates have gone up precipitously in the last few years. In fact, according to a study by Bloomberg News, some routes are seeing upwards of a 30% increase in freight cost.
Volatility and increases for freight cost are forecasted to only increase this year.
That is not to say that you should panic. "Necessity," they say, "is the mother of invention." Volatility and freight cost increases like these are the perfect catalyst for your business to optimize efficiency and decrease costs. Luckily, we live in a time of immense technological innovation.
From a finance perspective, one could argue that the various reasons for increases in freight costs are all by products of each other. That is, simple supply and demand.
Higher Demand
We are in a booming economy; consumer sentiment is high, incomes are going up, and unemployment is lower than it's ever been. Plainly, people are spending more.
Not only are they spending more, but they are increasingly relying on eCommerce, rather than in-store, for their shopping needs. This increase in spending and greater reliance on eCommerce has created greater demand on carriers and put increased pressures on the supply chain overall.
Lower Supply
As a result, the supply of trucks and drivers has diminished. Generally speaking, as demand increases a greater amount of supply will eventually enter the market to reach an equilibrium in which prices stabilize. However, the supply of trucks and drivers is not keeping up with the ever increasing demand.
Higher Wages
A recent report published by the American Trucking Associations found that annual salary for truckers in the United States rose roughly 18% between 2013 and 2017.
Given the increase in demand and the dearth of supply, it's no wonder.
However, even with higher demand and lower supply, an 18% increase in wages is massive. To put it in perspective, the average worker in the United States saw their wages increase by about 4%.
Higher wages mean higher freight cost which, in turn, will cost shippers more money.
What You Can Do to Mitigate
How can a business that does a large amount of shipping offset the increased costs that come with increased driver wages?
The answer is data.
By having access to the right data, a business can optimize their spending, renegotiate contracts, and improve their internal processes to streamline efficiency and, most importantly, save money.
There are 4 areas in which business must focus to find the savings needed to mitigate increased freight costs:
- Spend management
- Optimization
- Contract negotiation
- Process improvement
The key to addressing each of these areas lies in having best-in-class technology that enables businesses to have a full view of their freight spend.
Business Intelligence and Analytics
Powerful BI tools enable businesses to view key performance indicators affecting logistics across all different modes, channels, providers, and charges. These kinds of advanced analytics enable businesses to improve processes, increase transparency, and achieve strategic objectives.
Additional benefits of powerful BI tools include the ability to discover new opportunities for process improvement and allocation of valuable resources.
As costs increase, as they will continue to do, it is incumbent on businesses that ship to maintain their competitive advantage by leveraging technology and data in order to cut costs and find true savings.
