Consumer-goods companies confront high transportation costs

By James A. Cooke -- Logistics Management, 8/1/2005

WASHINGTON, D.C.—A new study of consumer-products manufacturers provides more evidence that rising transportation costs are eating into logistics budgets. The "GMA 2005 Logistics Survey," commissioned by the Grocery Manufacturers Association (GMA), found that transportation accounted for 62 percent of logistics costs incurred by consumer-products manufacturers. The study noted that cost increases, driven by rising fuel prices and capacity shortages, also have led to higher outlays for transportation services.

For the study, IBM Consulting Services canvassed 32 leading U.S. companies about their logistics operations. Participants in the survey ranged in size from less than $200 million to more than $20 billion in annual revenues. Eighty-six percent of respondents hailed from the food and beverage industry, and the remaining 14 percent came from the health- and beauty-care sector.

Participants incurred average transportation costs of $1.69 per mile, a 23-percent increase compared to three years ago, when the study was last conducted. Total logistics costs as a percentage of sales averaged 6.9 percent this year.

In addition to rising fuel prices, respondents said, changes in the hours-of-service rules for truck drivers have had a major impact on costs. Because the new rules effectively limit the distance a truck driver can cover in a single day, motor carriers have found it difficult to retain enough drivers to meet demand. As a consequence, overall shipping capacity has been reduced.

In a bid to control costs, shippers of consumer products are taking such steps as shifting traffic away from less-than-truckload (LTL) transportation to truckload and intermodal services. The survey found that 81 percent of the respondents plan to increase their truckload shipments, and 64 percent plan to increase their use of intermodal transportation. Sixty-two percent, meanwhile, said they were increasing the size of their shipments, compared to 59 percent in the last study. The size of the average shipment this year, by the way, was 26,166 lbs.

More retailers are relying on manufacturers to address the challenges of moving freight today. Several respondents reported that their customers were less willing to pick up shipments from the manufacturers' premises. In addition, consumer-products manufacturers are being asked to provide more value-added services. For example, some 47 percent said they "extensively" provide and another 19 percent "to some degree" provide preassembled, floor-ready displays to customers. And 25 percent said they "extensively" provide customer-specific packaging.

Despite those challenges, consumer-product makers have taken strides to upgrade customer service. Respondents' on-time delivery rate rose slightly, from 89.6 percent in 2002 to 90.5 percent in 2005. The order-to-delivery cycle time also improved, from 5.6 days in 2002 to 3.6 days in 2005. Study participants reported an average of 42 days' worth of finished-goods inventory on hand and said they typically achieve 8.7 inventory turns for finished goods each year.

Logistics managers at consumer-product companies clearly are being challenged by conflicting demands. Fifty-five percent of the respondents said they are "extensively" working on improving supply chain efficiency while simultaneously improving customer service.