Transport costs do not reduce because delivery is ‘free’

Roger OakdenLogistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

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Transport is not free

We know there is ‘no such thing as a free lunch’ – somewhere, someone has to pay. And so it is with transport. The term ‘free delivery’ has entered the language of logistics, so that even industrial and retail shippers expect a continuing reduction in freight costs, irrespective of the situation.

Costs are incurred in the transport modes of maritime (ocean, coastal and river), air, road and rail (with pipeline for oil). In each, costs will continue to increase, not only as a result of operating conditions but also due to current and future UN agreements and national government regulations.

As an indication of the cost situation, Amazon stated in its most recent annual report that costs to ship, which includes transport, sortation and delivery centre costs increased by 46 percent, while sales increased by 24 percent, year on year. It also stated that total costs to ship would continue to increase.

At the UN level, the International Maritime Organisation (IMO) 2020 maritime vessel emissions cap comes into force on January 1, 2020. It is estimated that for a large 20,000 TEU ship the higher fuel cost will add about U$50,000 a day to the operating costs. It has been stated that higher fuel costs may require an increase of 15-20 percent in the ‘emergency bunker surcharge’ passed to customers. This was discussed in the recent blog Transport emissions, new regulations and Supply Chains.

At the government level, the European Union (EU) Commission responsible for Mobility and Transport stated in a recent conference paper that “It’s not about incremental change any more, it’s about fundamental change. The transport sector will be forced to significantly cut emissions. Some operators will suffer and some will gain”.

The EU is promoting a ‘user pays and polluter pays’ principle, so the Commission will, over time, introduce a carbon border tax, an energy tax, renew its Emissions Trading Scheme and reduce exemptions for aviation. To assist in reducing transport costs, the ‘Green Deal’ (to achieve climate neutrality by 2050) has a major goal of digitalisation in the transport process. For example, paperless freight movement will be introduced across transport modes, countries and supply chains within a harmonised EU framework.

At the level of individual governments are potential charges and regulations on road transport. These could include: road usage charges, access charges for defined areas (such as central business districts), electric delivery vehicle requirements and delivery time restrictions.

An additional cost and cost recovery situation is the investment of public money in road, rail and port infrastructure, built to suit the requirements (and profit aim) of commercial businesses. In most cases, freight transport and logistics services businesses do not expect to contribute to the costs, as they promote a ‘bigger is better’ freight agenda. But will this approach by governments continue?

Some governments may be reluctant to pursue these possibilities, but recent experience has shown that large economies can demand changes to the internal functioning of other countries as part of negotiations for trade facilitation agreements (incorrectly called ‘free trade agreements (FTA)). So, if the EU is pursuing a strong emissions reduction goal, they will expect countries that trade with the EU to have a similar approach, to provide a ‘level playing field’ for EU trading companies.

Transport costs challenge

Because shippers view transport as ubiquitous (a ship is a ship and a truck is a truck), the willingness to negotiate transport contracts that trade-off known and potential cost increases in one area for cost savings in another are rarely pursued. A large courier express parcel (CEP) business noted in a recent conference presentation that “…we get sustainability requests in almost every tender – but customers are not prepared to pay more for it…”.

And this is the challenge. While shippers establish targets for performance internally, when it comes to the transport of freight, most shippers will depend on negotiated contracts with logistics service providers (LSPs) and transport carriers to achieve supply chain performance targets.

So, we have shippers that want improved performance from their supply chains; however, they do not expect to pay for it. On the other hand LSPs (which include transport businesses) need to make a profit. They expect to be paid for added costs and to share the value of improvements their technology investments provide. What to do?

Negotiating transport and logistics services contracts

As a start, Procurement professionals at shippers need to work with corporate accountants to identify the total cost of ownership (TCO) for items – not as easy as it sounds! An analysis of the TCO can identify elements where there is room for negotiation about deliverables (of which price is one part). For example, sustainability targets, which are becoming more common at large shippers, can be a deliverable, but they need to be negotiated with LSPs.

To assist in these negotiations, some non-government organisations (NGOs) have produced guidelines. For example, the Smart Freight Centre and the World Business Council for Sustainable Development (WBCSD) have released the Sustainable Freight Procurement framework This self-assessment tool can help to identify key activities and best practices to be implemented for improving the sustainability performance of shippers and their LSPs.

The Framework builds on the Supply Chain Leadership Ladder tailored to the Procurement category of freight sustainability. It allows a supply chain group to make an assessment of their relative maturity in sustainable freight procurement and to identify areas for improvement.

When a shipper’s Procurement team has completed the self-assessed sustainability framework evaluation, they proceed to the Smart Freight Procurement Guidelines for specific action items about how to reduce greenhouse gas (GHG) emissions and air pollutants from their transport and logistics services procurement practices.

These Guidelines complement the Global Logistics Emissions Council (GLEC) Framework for logistics emissions calculation and reporting.

Within a transport or logistics services contract, there are many elements beside sustainability to negotiate between shippers and LSPs. Some providing more benefits for one party than the other, while other improvements enable the sharing of risk and reward. Examples of elements for negotiation are:

  • geographic coverage of services and frequency of service
  • logistics services provided and potentially available.
    • ownership, control and influence at logistics hubs, port terminals, inland ports and with providers of equipment
  • extent of supply chain cooperation, coordination and integration
    • information about visibility and traceability of shipments
    • coordination with other transport organisations and facilities

At the conclusion of these negotiations, a shipper’s supply chain group will have a clearer understanding of the transport and logistics performance potential.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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