Executive Briefings

Rising Cost of Fuel Takes Its Toll on Supply Chains, as Companies Rethink Outsourcing Strategies

Soaring fuel costs are causing a slowdown in the migration of manufacturing to low-cost countries. So says Schneider Logistics in a recently released report on the state of the U.S. transportation industry, and its outlook for 2008. In fact, the rising cost of shipping might be spurring a reversal in that decade-long trend. The situation "is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas," Schneider says. The report adds that the price of crude "has definitely eclipsed all other issues impacting the global economy." Gasoline accounts for about 70 percent of the roughly 200bn gallons of gas and diesel consumed by the U.S. economy each year. So every penny change in the price of fuel diverts $2bn from spending on goods and investment. Taking into account increases of $1 per gallon of gasoline and $2 per gallon of diesel over the past year, "that suggests a diversion of approximately $260bn from goods and investment to petroleum." The housing and credit crises only add to the economic woes, Schneider says.

Transportation providers, of course, are among the hardest hit by rising fuel costs. They have responded with significant price increases, placing an additional burden on global supply chains. Long-distance, less-than-truckload carriers boosted rates by 9.2 percent between March of 2007 and 2008, while truckload prices rose by an average of 3.7 percent in the same 12-month period. "Without a doubt," says Schneider, "we are looking at a market with modest volume volatility and major price volatility. Because the price pressure is cost driven, it is a threat to profitability." Still, the company sees some positive signs developing. Four key factors that affect carrier profitability "are absolutely moving in the right direction," it says. They include carrier bankruptcies, improving mileage utilization, lower empty miles and a supposed flattening of rates. Yet executives of some major truckload carriers have warned that rates will continue to rise, in the range of 3 percent to 10 percent, not counting fuel surcharges.

Visit www.schneider.com/logistics/

Soaring fuel costs are causing a slowdown in the migration of manufacturing to low-cost countries. So says Schneider Logistics in a recently released report on the state of the U.S. transportation industry, and its outlook for 2008. In fact, the rising cost of shipping might be spurring a reversal in that decade-long trend. The situation "is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas," Schneider says. The report adds that the price of crude "has definitely eclipsed all other issues impacting the global economy." Gasoline accounts for about 70 percent of the roughly 200bn gallons of gas and diesel consumed by the U.S. economy each year. So every penny change in the price of fuel diverts $2bn from spending on goods and investment. Taking into account increases of $1 per gallon of gasoline and $2 per gallon of diesel over the past year, "that suggests a diversion of approximately $260bn from goods and investment to petroleum." The housing and credit crises only add to the economic woes, Schneider says.

Transportation providers, of course, are among the hardest hit by rising fuel costs. They have responded with significant price increases, placing an additional burden on global supply chains. Long-distance, less-than-truckload carriers boosted rates by 9.2 percent between March of 2007 and 2008, while truckload prices rose by an average of 3.7 percent in the same 12-month period. "Without a doubt," says Schneider, "we are looking at a market with modest volume volatility and major price volatility. Because the price pressure is cost driven, it is a threat to profitability." Still, the company sees some positive signs developing. Four key factors that affect carrier profitability "are absolutely moving in the right direction," it says. They include carrier bankruptcies, improving mileage utilization, lower empty miles and a supposed flattening of rates. Yet executives of some major truckload carriers have warned that rates will continue to rise, in the range of 3 percent to 10 percent, not counting fuel surcharges.

Visit www.schneider.com/logistics/