Introduction
If you think the price of fuel is the only element driving freight costs higher – think again!
The latest, “Master of Logistics 20th Annual Study of Transportation and Trends Study” [1] reports that in 2011 the highest percent of transportation costs was ground freight at 76.1%, of which US long haul trucking holds a major position at 64.4%. This was followed by 8.7% air, 8.3% ocean, 4.2% rail, and 2.7% barge / other. Not surprisingly, the most utilized freight activity in the US is ground freight, in particular, long haul trucking. This article will address three major elements of freight costs, the factors that will drive these costs higher and at the same time, offer possible solutions. Make no mistake, once the finished product is made, whether it is transported to clinical sites or through the commercial wholesale network to the retail network or transported through novel channels to the patient’s home, ground freight is clearly involved.
The Outlook
As mentioned, ground freight especially long haul trucking, is a major portion of transportation activity and costs. The three top elements of long haul trucking costs are: fuel prices; labor costs; and truck / equipment costs, in that order of magnitude. The impact of rising yet fluctuating fuel prices [2], increased labor costs with the shortage of drivers [3] and higher truck / equipment prices [4] coupled with more restrictive Federal guidelines reveal a future of higher costs. Due to the complexity of each element, there are no easy quick-fi x solutions. The key to these solutions lies in understanding each element and their business functions.
The Cost of Ground Freight
The future challenge is how to deal with the key elements of freight costs.
For the pharmaceutical industry, future market plans, as reported in professional journals, include expanding the number of distribution channels. The additional channels [5] will add shipping routes, increasing shipments with new products utilizing larger, heavier shipping containers. These new products are temperature-sensitive, often referred to as cold chain products. The outer shipping container for a cold chain product is generally larger and heavier [6] than an outer shipping container for an identical size product that is not cold chain. Therefore, the freight costs are higher when cold chain products are shipped. A major characteristic of the next wave of new drugs in the R&D pipeline are cold chain. This explains why rising fuel prices, labor and truck costs are important and will prove vital to the pharmaceutical industry. By 2015, eight of the top ten drugs are forecasted to be cold chain [7]. Consequently, the result will be increased freight costs for pharmaceutical clinical and commercial distribution.
Is There a Way to Offset These Increasing Costs?
The best indicator of distribution cost is the US Freight Rate Index, CPM (freight cost per mile) graph below. This illustrates that 2011 levels are on par with the 2008 levels [8] while more current data shows the 2012 levels are slightly above 2008 levels.
In November 2012, the US Freight Rate Index or CPM was $2.48/mile versus the low of $1.82/mile in January 2009 [9].
The Freight Rate Index indicated that over 81% of the cost resides in fuel, labor, and truck / equipment, depicted in the bar graph below [2].
A) Fuel Prices - represent 30.8% of Freight Costs
The Fuel Prices are influenced by supply and demand, US economy and extreme weather patterns (such as, the tsunami in Japan and hurricanes in the US). When looking at gasoline or diesel fuel price, the best indicator is to look at the crude oil price.
Crude Oil Prices
In 2008, the price of crude oil surpassed $138 per barrel [10], strangling key areas of business and personal spending. By 2009, a shrinking US economy and global demand dropped crude oil price down to $40 / barrel. Since that time, over a period of three years, the price has slowly crept up to $100 / barrel [11]. This glimpse of high fuel prices in 2008 provided a “signal” to take action. Today, the cost of oil production is approximately $70 / barrel. Not surprisingly, industry experts agree that as demand returns to pre-2008 levels, the oil price of $100 / barrel is here to stay.
Most analysts suggest that if US domestic oil fields were opened to increased drilling, crude oil prices would fall [10], perhaps to the 2006 level of $70 / barrel, resulting in a drop in US gasoline and diesel prices.
B) Labor Costs - represent 27.7% of Freight Costs
Since 2010, the shortage of drivers has grown dramatically. The labor costs from shortage of long haul drivers are due to many factors: retiring drivers, driver’s retention factors, driver’s recruitment factors and artificial demand caused by Federal guidelines.
Retiring Drivers -
- According to a study conducted by Global Insight, a research company hired by the American Trucking Association (ATA), the current driver population reveals that the majority of drivers are primarily composed of baby boomers [12] as shown in the bar graph above. Further, the study shows more drivers are retiring (leaving the industry) faster than can be replaced by new drivers [3].
- The first report of the actual long haul driver shortage was reported in 2010 as shown in bar graph below. In 2012, the shortage of long haul drivers [13] is expected to be over 150,000 with a possible shortage for 2013 well over 250,000.
- Recent estimates by Bob Costello, ATA Chief Economist, place the 2012 shortage at 30,000 drivers [19], well below other industry estimates. Nevertheless, this view reveals there will be a growing shortage albeit a different magnitude of growth.
Barriers to Driver’s Retention
Regulations dictate that a long haul driver must possess a special driver license called a CDL [15] along with maintaining a certain safety level to continue to be allowed to operate.
Key Points:
- The long haul driver’s lifestyle is stressful, working away from home and on the road several weeks at a time.
- In the past, Federal agencies published the transportation company’s safety performance for public view.
- In the recent past, Federal agencies added individual driver safety performance in the public RECORDS [14].
- In other businesses, if an employee has performance problems, an individual has a choice: to improve or move on to another job and start anew. In this case, the individual’s performance record is open to potential employers and public scrutiny throughout the driver’s career [14].
- Many transportation companies limit hiring primarily to experienced drivers with high levels of safety performance due to customer demands [4].
- The high turnover rate of the long haul driver population has grown and continues at a very high rate as shown below [4].
Barriers to Driver’s Recruitment -
- Truck driver training takes six weeks and costs between $4,000- $6,000, a significant barrier for entry level employees. After the training, the potential driver must pass tests and receive the CDL before employment may be offered [14].Note: Some employers reimburse the CDL licensed driver for training expenses.
- The current Federal guidelines require that a driver must be at least 21 years old, discouraging many could be high school graduates who then pursue other trades. Although there is a provision for a supervised 18 yrs. old CLP, due to several factors, most employers raise the hiring requirement to 23 yrs. of age [15].
Federal Guidelines Creating Artificial Demand -
Beginning July 2013, new Federal guidelines will reduce driver work time from 11 hours in a day to 10 hours in a day [16], effectively reducing vehicle capacity and possibly delaying deliveries [4]. This action will increase the demand for even more drivers.
Labor Cost Outlook –
Due to a shortage of drivers, labor costs have risen. It goes without saying this shortage will not be resolved for at least 10 years under current industry practices. It is estimated at best 60,000 and at worst more than 200,000 new drivers will be needed to meet demand in 2013. The driver wage portion of labor costs may decrease slightly as older baby boomer [3] drivers are replaced by younger, lower-waged drivers, but due to other factors the total labor costs will continue to rise. Consequently, over the long-term, labor will become the most costly element overtaking fuel costs for transportation companies.
C) Truck / Equipment Cost - represent 23.4% of Freight Costs
- The current Federal guidelines have increased truck prices up to 40% over the last three years as a result of modernizing engines.
- Future Federal guidelines for additional driver and vehicle administrative [17] workload will be absorbed by technology costs instead of labor for recordkeeping and vehicle tracking.
- In addition, the EPA has proposed mileage requirements to improve miles per gallon (mpg) by 10%-20% for heavy trucks [18] to take effect beginning in 2014. Consensus supports that these standards will push truck / equipment cost higher.
Bottom line: the truck / equipment cost outlook for the next 5 years will face an increase of 40%-50% [4]. Although fuel consumption should drop, the lower total fuel cost in the future will be offset by higher truck technology-related costs. Adding these costs to rising labor costs will continue to drive the overall freight cost higher over the next five years.
Summary
The trends and forecasts support increasing freight costs in each of the top three elements in the next 5 years. What’s driving costs higher?
- Increased fuel costs are tied to national supply and demand. Caveat: If domestic oil drilling restrictions are withdrawn, fuel prices may decrease.
- Increased labor costs continue to be influenced by the shortage of drivers and restrictive Federal regulations.
- Truck costs will continue to increase because of technology upgrades prompted by:
· Federal administrative requirements that currently require extensive documentation and monitoring
· New engine technology that will be more efficient and lighter
· Future Federal standards will require 10%-20% mile per gallon increase
· Future Federal guidelines will add more driver and vehicle documentation.
Possible Solutions
The challenge is how to deal with higher costs.
Some possible solutions:
Ground Freight Costs
- Use alternative lower cost fuels, such as natural gas.
- Explore alternate sources of transportation, such as an airship or rail.
Fuel Prices
- Lighter engines and trailers for light payloads should decrease fuel usage.
- Realign value chain inventory or manufacturing sites closer to customer clusters.
- Utilize lighter, newer packaging holding more units, lowering the effect of fuel costs.
- Find lower cost fuel, such as domestic oil drilling, natural gas, etc.
Labor Costs
- Implement technology to absorb Federal documentation and monitoring of drivers, offsetting the potential increase in labor. This concept is similar to workforce automation.
- Improve turnover by implementing changes to make driver lifestyle more tolerable. Identify, address and solve (when feasible) retention failure causes.
Truck Costs
- Encourage technology to improve mpg with more efficient lighter engines and trailers [17].
- Absorb Federal guidelines for documentation and monitoring through technologies such as: GPS, security signatures, digitizing, computerizing, etc.
- Companies should realign value chain strategy placing products closer to customer clusters, reducing number of shipments and payload size.
- Use lower cost alternative transportation.
Path Forward
There is a path that leads to lower freight costs.
Left untouched, freight costs will continue to rise.
On the other hand, by focusing on the three elements, over 81% of freight costs, can be addressed and lowered through a myriad of creative solutions.
References
1. Holcomb, Mary C and Monradt, Karl, contributing editors, “20th Annual Study of Logistics and Transportation Trends,” September 01, 2011
2. US Freight Rate Index CPM Cost Component (October 2012); source: www.freightrateindex.com
3. Jeff Berman, “New ATA report focuses on ways to address the truck driver shortage,” Logistics Management Magazine, July 17, 2012
4. Paul Davidson, “Attention out of work Americans: Want to be a trucker?,” USA Today, June 26, 2012 with Driver Turnover Graphs by Janet Loehrke, USA Today
5. PwCUS, “Supplying the Future: which path will you take?” from the six trends, Pharma 2020 report series from PwCUS, posted by Heathcare Packaging on March 4, 2011
6. Rizzo, TJ and Ulrich D., “Bringing room-temperature pharma shipping under the “CRT” umbrella” Pharmaceutical Commerce, March/April, 2012, pp. 22-24
7. Basta, N., Pharmaceutical Commerce, Nov/ Dec 2011, p.1” and Jan/Feb, 2012, p.26 & 30”
8. US Freight Rate Index CPM Historical Graph (2007-2011); source: www.freightrateindex.com
9. US Freight Rate Index CPM Historical Graph (YTD 2012); source: www.freightrateindex.com
10. Goff, R., “Approaches to Offset Rising Fuel and Distribution Costs” Journal of Pharmaceutical & Biopharmaceutical Contract Services,” May/June 2011, Vol.2, Issue 3, pp. 30-35
11. Crude Oil Cost History (2004-2012) graph; source: www. tradingeconomics.com | NYMEX
12. “U.S. Truck Driver Shortage: Analysis and Forecasts” prepared by Global Insights, for ATA 2005 Source: http://www.truckline. com/StateIndustry/Documents/ATADriverShortageStudy05.pdf
13. SCDigest Editorial Staff, “Logistics News: Truckload Driver Turnover Exceeds 100,000 for First Time in Four Years, Fanning Fears Over Looming Driver Shortage - Is the Big Crunch Really Coming Soon?,” Supply Chain Digest's On-Target E-Magazine, September 19, 2012. Source: http://www.scdigest.com/ ontarget/12-09-19-1.php?cid=6220&ctype=content
14. Matt Olberding, “Truck Driver Shortage,” Lincoln Journal Star, June 30, 2012
15. US Department of Transportation, Federal Motor Carrier Safety Administration, Commercial Driver’s License Program, source: www.fmcsa.dot.gov › Registration & Licensing
16. US Department of Transportation, Federal Motor Carrier Safety Administration, “Summary of Hours-of-Service (HOS) Regulations,” source: https://www.fmcsa.dot.gov/hos
17. Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium and Heavy-Duty Engines and Vehicles, Federal Register, 57106-57514. Volume 76, No 179 / September 15, 2011
18. EPA, Regulations and Standards for Heavy Duty Trucks, Source: http://www.epa.gov/otaq/climate/regs-heavy-duty.htm
19. William B. Cassidy, Senior Editor, “How big is trucking’s driver shortage? …ATA estimates 20K to 30K truck driver shortage,” The Journal of Commerce Online, September 12, 2012. Source: http://www.joc.com/trucking/ata-estimates-20k-30kdriver- Shortage
C. Ray Goff Jr. has over 20 years in management with Fortune 500 biopharmaceutical. He is a subject matter expert for cold chain, distribution, supply chain, logistics, risk management and project management. In his recent corporate role, Ray was Director, Pfizer (formerly Wyeth) Vaccines R&D leading the global clinical supply chain, logistics and distribution. Noteworthy was his successful leadership of a mega-scale vaccination study to over 85,000 subjects and over a hundred other clinical trials. Ray is a PMP, holds several Executive Certificates from MIT, a BS in Mathematical Economics, published numerous articles and served in leadership positions in professional associations.