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Buyers of services in the transportation and logistics sector have benefited from favorable purchasing conditions in recent years. Highly competitive markets have allowed buyers to secure reasonable prices and favorable contract terms. However, as fuel prices begin to rise and higher regulations drive vendors’ costs up, buyers can expect to lose some of their market leverage in the coming years.

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, although price adjustments are often passed through 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
  • Upstream steel and aluminum producers face high risks stemming from volatile product prices and import penetration from cheap, foreign producers
  • Car, truck and bus manufacturers pass this risk through to transportation companies and category buyers
  • Depreciable assets are purchased infrequently and many transportation companies only purchase new vehicles or vessels when fuel prices are exceptionally high
  • Some suppliers will face higher equipment costs in the coming years. For instance, California’s environmental regulations require more fuel-efficient trucks by 2023, and all National Trucking Service providers must have an electronic logging device (ELD) as of December of 2017

Key Takeaway: Buyers should budget for base rate price increases in some transportation markets as vehicle and equipment costs increase during the next three years

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.


Recent Price Trends

  • Transportation and logistics service prices have risen during the past three years as suppliers’ fuel costs have increased
  • Most transportation services providers charge a base rate plus a fuel surcharge
  • Service providers are typically not able to profit from this fuel surcharge, so prices will remain elevated as suppliers look to protect their profit margins from crude oil’s high price volatility.

Outlook

As fuel prices continue to grow slowly over the next three years, service providers are expected to increase their prices in order to cover costs. At the same time, higher depreciation costs for some markets will cause shipping base rates to rise in addition to fuel surcharges. Buyers should therefore seek to lock in current shipping rates through long-term contracts, if their needs are significant. However, transportation and logistics contracts often still allow for the adjustment of fuel surcharges, so buyers can expect to have less buying power in the coming years.

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