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Buying conditions have been shifting within the transportation and logistics sector in 2018. Regulatory changes, tight labor markets and a reversal in price trends have caused less favorable purchasing conditions for buyers with substantial shipping needs. Still, most logistics markets remain highly fragmented, so buyers are able to select from a wide number of providers if necessary.

Price Trend & Forecast

  • Most transportation services providers charge a base rate plus a fuel surcharge, both of which have been rising as carriers’ costs have increased
  • In particular, fuel surcharges have risen as the world price of crude oil returns to growth following several years of price declines
  • Higher costs have cut into carriers’ profit margins, making suppliers less willing to negotiate on prices

Key Takeaway: Buyers should brace for higher transportation service prices and are encouraged to seek vendors with a newer, more fuel-efficient fleet in order to minimize the impact of fuel surcharge spikes.

Risky Supply Chain

Petroleum Producers

  • Highest risk derived from upstream petroleum refiners, wholesalers and bulk stations
  • Unpredictable gasoline and diesel prices increase the risk that a supply contract may shift suddenly
  • Unstable fuel prices often cause high volatility in the price of transportation and logistics services, with price adjustments typically passed through to buyers in the form of fuel surcharges

Key Takeaway: Buyers should maintain a list of vetted suppliers in case their preferred vendor experiences a supply chain disruption or their current contract becomes cost inefficient.

Equipment Manufacturers

  • Car, truck and bus manufacturers inherit risk from upstream steel and aluminum producers, which are at risk of volatile prices, uncertain supply and other geopolitical factors
  • Depreciable assets are purchased infrequently though, and many transportation companies only replace their fleets fuel prices are exceptionally high
  • Emissions and safety regulations have increased over the past decade, although most new regulations include an extended roll out or delay period before the final deadline for implementation. Nonetheless, regulations on equipment can increase carriers’ depreciation costs, triggering a shift in market prices when regulation deadlines approach

Key Takeaway: Buyers should consider the age and compliance of a vendor’s fleet when determining the length of a proposed contract, as carriers that require updated equipment are likely to pass through these increases when their fleet costs rise.

Regulatory Changes

  • Steel and aluminum tariffs have disrupted the supply chain for many transportation service providers, as these inputs are vital inputs for the manufacturing of the aircraft, ships, trucks, trailers and chassis used to transport goods
  • Vehicles are facing stricter emissions and safety requirements, such as the electronic logging device (ELD) mandate, required for all National Trucking Service providers as of April 2018
  • More restrictive requirements for pilot certification and flight times will increase costs for airfreight, while similar hours-of-service rules for truck drivers have exacerbated a driver shortage

Key Takeaway: Buyers should examine the regulatory landscape of all transportation markets in their supply chain, and can work with logistics providers or consultants to ensure that their vendors will remain compliant.

Specialization

On average, transportation services have a low level of specialization, with most carriers offering minimal customization to buyers (other than the route over which cargo is carried). Logistics services, on the other hand, often have a higher level of specialization, because suppliers must work with a complex network of vendors to provide customized services for each buyer’s shipping needs. Therefore, logistics services are generally sourced through long-term contracts, as vendors often require a few months to become familiar with the buyer’s operational requirements. Buying lead time is longer for logistics services than for cargo transportation services.

Key Takeaway: Buyers should seek transactional relationships with most transportation service providers. They should approach more specialized markets, including Third-Party Logistics Services and Transportation Management Systems, using a collaborative, long-term relationship style.

Outlook

As fuel prices continue to rise over the next three years, service providers are expected to increase prices in order to cover costs. Meanwhile, higher depreciation costs and tightening labor markets will also cause shipping base rates to grow. Buyers should therefore seek contracts with vendors that have fuel-efficient fleets and strategies for mitigating their own supply chain risks, if their needs are significant. However, buyers should note that transportation and logistics contracts often still allow for the adjustment of base rates and surcharges, so buyers power will diminish in the coming years.

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