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OPERATIONS

Outlook 2006: Logistics

The shipping news.
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The Challenge On the bright side, ports aren't likely to be as clogged as they were in 2005. On the dark side, just about everything else is pushing shipping rates up. The problems start with capacity. Last year, says Dan Sanker, president and CEO of logistics company CaseStack, a two-time Inc. 500 company based in Santa Monica, Calif., "was one of the worst years for transportation capacity that we've had in over a decade." Following the economic downturn of 2000, more than 11,000 carriers with five or more trucks went out of business, says A.G. Edwards analyst Donald Broughton. Plus, the rail system has been operating at record capacity. When the hurricanes diverted trucks to the relief effort in New Orleans and the holiday season raised demand, it left the market tight at the end of the year. As Gulf Coast trucks get back into circulation and shipping companies add trucks, that should loosen things up. "There should be better capacity, but it's still going to be short," says Ken Oaks, president of Total Quality Logistics, a $101 million freight brokerage based in Milford, Ohio.

Driver shortages are another concern. The American Trucking Associations recently projected a driver shortfall of 20,000 a year, rising to 110,000 a year by 2014. The nation's improving employment rate means truckers can find work close to home. To attract drivers, most companies are increasing salaries, and that increase is passed on to customers.

Adding to the problem, the hefty fuel surcharges that shipping companies tacked on this year are likely to become the norm, since fuel prices are expected to stay high. And, since 9/11, insurance costs have zoomed up, particularly for shippers of hazardous materials.

What You Can Do Businesses, stuck with the higher costs, are adjusting elsewhere, and one solution is open more warehouses around the country to reduce the need to ship. "Warehousing makes up 25% to 28% of your total logistics cost. The rest is transportation," Sanker says. "Warehousing costs aren't really going up that much, but transportation costs are going way up. So if you can figure out ways to reduce transportation costs even slightly, it makes sense to let warehousing costs increase a little bit."

Though capacity is improving, salaries, fuel, and insurance all mean that you should set aside more money for shipping. "Rates overall will probably bump up a little in '06," says Mike Jarrett, a former FedEx vice president who runs Jarrett Logistics Systems, a supply-chain manager in Orville, Ohio. And that's not a one-time thing. "Long term, transportation logistics are going to cost more," Sanker says.

What Insiders Watch

  • Oil prices
  • News and statistics from industry trade group American Trucking Associations.
    www.truckline.com
  • The quarterly supply-chain report from Bear Stearns' Edward Wolfe, who surveys shippers on rates and capacity problems.
    www.bearstearns.com
Last updated: Jan 1, 2006




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