Implication of rising fuel costs in freight transportation

Abstract The focus of this review is on road freight transportation and the impacts that volatile fuel prices have on the way transport freight firms operate. Transport freight and logistics is a segment of growing importance in the manufacture industry due to the percentage of the total cost in the operation

This research focuses on the implications and impacts of rising fuel prices in the road freight transport sector. Growing demand and how firms adjusting their services to keep profitability in a fierce competitive environment.

Introduction It seams too simplistic to suggest that rising fuel prices is the main cause of the challenges and implications faced by the transport freight companies and the manufactures.

The aftermath of the GFC and the bankruptcy of the Lehman Brothers in 2008 saw the prices per barrel of crude oil have a sharp decline from U$147 to U$35 since them fuel costs is been on the rise trading at around U$ 106 this week, the oil price is influenced by several forces from: growth in emerging countries to technological and natural disasters, (F.Gross, Hayden, Butz 2012)

Leinbach and Capineri (2007), ‘energy consumption within the transportation sector has increased nearly 47% in the past two decades compared to 4% in the other industrial sectors’(Bono, Jang and Noble, 2013, 203). Therefore energy consumption in supply chain is a segment of growth importance due to the percentage of the total cost in the operation, the associate increasing costs in transportation has challenge that need constant solutions. (International Journal of Production Research, 2014Vol. 52, No. 1, 203–220),

Manufactures response from rising costs in transportation, the influence in decision-making and the allocation of their resources, capital and human. These trade offs of between, distance location of the manufactory plant and the final consumer, producing or outsourcing, just in time versus bulky stock result the total miles that a cargo travel therefore reflects on its final the price. Logistics operators become heavyweight players on the manufacturing game, with a rise in transport costs, profit margin are declining,(Hoffman, W 2006),

Transport freight operators have also to adapt, becoming more efficient. Investment in new technologies and strategies to consolidate the operations, the impact of the rising costs in a industry that operate with a smaller than national average profit margin. ‘With average profitability of just 6.2%, the dividing line between success and failure is narrow’ (333 group. No. 12-08, 2012).

Literature

Supply chains consist of different functions : strategy, procurement, palning, transportation and distribution, logistics as a consolidated group of activities emerged between 1960 and 1970,( Ballou RH 2007).

Supply chains have been built in a concept that fuel is inexpensive (Rogers, Kelly, Rogers &Carter 2007), although other research’s affirm that this scenario has changed and the stakeholder involver are having to adapt and transform their methods to survive, (Tanowitz, Rutchnik ,2008).

The logistics industry in Australia count for 3.1% of the GDP and its revenue of $ 94 billion contributes to the Australian economy. The Australian export sectors and manufactures rely on the services provided by the Freight industry. (333 group. Publication No. 12-08, 2012). Freight industry has many volatile variables and average profitability below Australian average. Since 2008 the rising prices in fuel have been in a constant

challenge and the Industry is been in a transformation to adapt to the new demand and to be able to operate profitable.

The Freight industry after GFC have seen almost 15% of the companies involved to cease operation, demand for freight have fallen from 2008 till 2010 with consumers still cautious with their spending, a moderate growth from 2011 even tough the retail industry still going trough a turmoil, in 2012 the industry has seem a growth in demand improving profitability even tough the costs of fuel still rising.

The road freight industry has a fierce competition, large number of owners and drivers and small firms keen to undercut price in order to keep the customers.

‘Almost 60% of demand for road freight comes from manufactures, wholesalers and retailers’ (333 group. 2012), therefore the close link of the economic activity.

Rising fuel costs especially for line haul freight operators are a bigger concern than short haul 30% against 10%, the biggest concern for short haul is labour costs, other costs of operation as capital loss, tyres and maintenance, specially registrations has seen a sharp increase over the last 5 years.

There are energy costs on the handling of materials trough the supply chain, and consequently the fact that energy efficiency can have a impact on (ROI), the stakeholders involved are turning their attention to the facts that energy prices are escalating and SCM is highly dependent on this variable,(Halldórsson & Kovács 2010)

Recommendations

Green logisticsFuel increase costs is one of the many variable inputs into production, therefore better energy efficiency will minimize the economic impact into the freight transport and manufacturing in all levels from procurement to distribution,(Henderson, H 2008)Green logistics and optimization are linked very closed and is a strong relationship between them, (Imen, Yannick , Atidel 2014)

Cargo optimizationOptimization of cargo can increase dramatically profits within the Industry in general, investing in TMS and ERP systems. ROI (return on investment) its strongly linked to the way the SC is manage in a competitive market with lower than average profit returns, planning and organizing the chain of supplies in either the freight transportation or the manufacturer. (Henderson, H 2008). Constant updates and correct and accurate data is a critical point to be able to find the optimum balance between distances that a cargo travel optimizing the flow of goods.

‘Vehicle monitoring technologies and route optimization software can provide management with a greater level of control over vehicle-related direct costs’,(road-freight-industry_part-1 ,2012) publication

To achieve a optimum point in Australia companies will have to have a accurate forecast for planning, pricing and have the correct decisions made for all different situations, (Dormer, 2011). Constant collection of data, transformed into KPIs analyzed to keep improvements happen at all times

General investment in infrastructure The increase in demand for Road freight transportation and population growth, need to be offset by investment in public transport infrastructure, to diminish the demand for road users, facilitating the flow for road freight firms and also efficient design of new roads, ports and rail to support the increase demand for general freight transportation. Better connectivity for intermodal will allow for less congestion roads also.

Just in time to carrying more inventoryThe trade off between carrying more stock or operating lean ( JIT), the rise in prices of logistics have a movement in manufactures to carry more stock, the challenges involved in manage the supply chain is growing. (World Trade, 2007). Carriers will need to have a optimum point of amount of stock versus

Third part logistics Manufacture firms that have in house logistics are moving to use 3PL services. Third party logistics have the power to consolidate freight, therefore operating with cargo as full as possible. With the growth in 3PL more resources will be invested in R&D, modern fleet, therefore bringing continuous benefits for its users with the lower level of in house capital investment, according to (Shams, 2011)86% of 3PL users are satisfied with the level of service provided, also 76% of the users decided to use 3PL to reduce their costs.

Conclusion

The conclusion is that even tough fuel price is on the rise; the industry is overcoming this situation in a positive way.

Companies are investing in the short run in technologies that enable them to optimize their cargo and minimize the usage of energy therefore been more environmentally friendly.

On the long run investment in capital structure, and public infrastructure will balance with the ever-growing demand for products therefore freight and logistics services also manufactures are also moving from their in house logistics and making more use of 3 Pl.

3PL firms will have more power to consolidate, in house logistics movement to outsource is having a positive impact for society and firms, as more efficiency will cut costs and reduce emissions.

According to economists perfect competitive markets, bring benefits to the overall economy. Innovations come at a fast pace, services are more informative and the users of transport freights have a better access to information on prices and transit times of their cargo. As a competitive market with four of its major providers that contribute with 15% of the total revenue, road freight industry faces strong competition and tight profits, continuous investment to improve their services are of major importance. The rise in fuel prices have kept this companies on their toes as the game tighten, road freight is fuel intensive, the only way to keep the business in a competitive market is to be able to be at the top of the game.

Collecting data, properly analyzing, thinking critically to support better decision making process is transforming the transport and freight industry, firms have to think trough the whole chain how they spend their resources and the impacts derived from this decisions, the freight industry and manufacture sector are transforming each other, the way they do business and a growth in relationships will keep shaping the future of the supply chain.

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