15.03.2022

Drastic rise in fuel prices puts dramatic strain on freight forwarders’ coffers

Over 2.20 euros for a liter of premium gasoline; diesel, once so inexpensive, is even more expensive at 2.30 euros per liter. Fuel prices have skyrocketed throughout Germany. The situation is particularly difficult for those whose business is driving: the freight forwarders.

According to an article published in Augsburger Allgemeine (in German), 20,000 small companies with one to nine employees and one to three trucks are affected. These are mostly classic medium-sized companies that are now in danger of going insolvent. The consequence of the price increases will be that higher transport costs will be reflected at the end of the supply chain and will have to be passed on to the customer or consumer.

Of course, large logistics companies are also affected. “We are actively in dialogue with our customers so that together we can get through this difficult time,” Helmut Treffer, a member of the management board at logistics company Andreas Schmid in Gersthofen, is quoted in the article. 140 of its own trucks are on the roads for the company, plus independent transporters. Customers can understand the problems, Treffer says in the interview. Transportation costs will continue to rise in the future, and energy prices are always the biggest cost drivers. According to Treffer, for a diesel truck, fuel currently accounts for between 27 and 40 percent of operating costs.

Multi-drop delivery is the “last mile” of the logistics chain and a critical element in the complex goods distribution system. Yet the public rarely takes notice of it – as long as it works smoothly. In recent years, however - in addition to the current dramatic rise in fuel prices - a number of tough challenges have emerged for which there are no easy answers:

(1) Operating at capacity limits

For years the volume of shipments has been growing steadily. The pandemic has aggravated this trend: a significant portion of the retail business has shifted online, and some of it is affecting the part load distribution segment which is increasingly handling B2C shipments. But even in the traditional B2B segment, which typically serves a fairly constant client base, operators are frequently working at full capacity and often beyond. Increasingly they find themselves unable to deliver shipments the next day, which means that items remain at the depot longer, blocking valuable storage space and obstructing routine processes. While the added complications resulting from COVID-related health protection measures are likely to disappear before long, the number of shipments remains extremely high, pushing the distribution and collection networks to their limits across all regions. Many companies try to get some relief by refusing to accept loads temporarily, imposing load limits or even skipping entire delivery zones – something they are very reluctant to do. Investing in depot expansions or new buildings and vehicles cannot fully compensate for the excessive workload because the labour market is tight. Leading industry players believe that deploying advanced technologies to optimise processes is a much more effective strategy.

(2) Dispatch process

Constantly working at the capacity limits confronts dispatchers with nearly unsurmountable difficulties. Even in more “normal” times, dispatching was an extremely complex task requiring years of experience and strong organising skills. Today it is a Gordian knot – how can you reconcile an ever growing volume of shipments with limited transport capacities? All dispatchers can do in their stressful day-to-day routine is accept less-than-perfect results. They have to improvise and make do with an unsatisfying outcome because they simply do not have enough time to accommodate every shipment and achieve efficient loads and vehicle routes. The best option to tackle this challenge is to shift processes and sub-processes which do not necessarily require human intelligence to powerful software. There is still plenty of hidden optimization potential.

(3) Costs

Unpredictable crude oil prices in the global markets and the steep rise of fuel costs, aggravated by the stepwise increase of the German CO2 tax, are turning into a major economic headache for the logistics industry. While fleet operators could in theory raise their rates to compensate for the extra costs, they have little leeway considering their international competitors whose overall operating costs are often lower. The general labour shortage and rising payroll costs, not to forget the high number of overtime hours and weekend allowances, are additional factors nibbling away at the bottom line. The limited number of available vehicles and drivers pushes up the daily rates, and congested warehouses are forcing operators to either restrict the number of shipments they accept or rent costly extra space. All this has a negative impact on logistics companies’ earnings, forcing them to scrutinise their operations for optimisation potential – such as internal processes where leading-edge software could save many man-hours and free up staff for value-adding activities.

(4) Emissions

The transport sector must achieve carbon neutrality at some point in the not-so-distant future – an ambitious goal especially for part-load distribution networks. The pressure to reduce greenhouse gas emissions is growing. To date no viable alternative fuel or energy source for trucks is available or even foreseeable. The current supply of biofuels is by no means sufficient. Investments in lower-emission vehicles must be economically feasible for owners. For the time being, the logistics sector has no other choice than to seize all available opportunities to minimise its emissions, for example by giving preference to the lowest-emission vehicles of the fleet whenever possible, provided there is a choice. This means that the highest-emission routes or engine operating hours must be assigned to these vehicles – not an easy task by any means. Using powerful vehicle and route planning software can help achieve this, especially when combined with dispatch optimization.

(5) Uneven demand

While the logistics industry is currently experiencing a mega boom, it would be naive to expect this to continue forever. Multidrop delivery is a day-to-day business, and a significant portion of the shipment volume is unpredictable. No-one knows what will happen on the retail front when the pandemic is over. The general challenges affecting the international supply chain are not going to go away anytime soon; the container shortage is decreasing quite slowly, and China’s Zero-Covid policy continues to cause disruption at international terminals, leading to cascading delays for containerships and deliveries. Other factors and events, such as the Ever Given getting stuck in the Suez Canal, or political conflict situations, can cause significant and abrupt fluctuations in transport demand. Investing in new depot space and vehicles and hiring new staff may help an operator handle the current workload but also harbours a financial risk if demand slumps for more than a few days. Investing in a powerful process optimisation solution, on the other hand, can be very helpful in mitigating these risk factors. The use of Artificial Intelligence (AI) is a particularly effective way to account for “soft” influential factors since AI algorithms can “learn” from human decisions made in specific situations and incorporate this insight into future automated decisions.

While not every challenge in part-load distribution logistics can be tackled by software, an advanced, AI-supported solution can optimise and automate many processes.Thanks to route optimization and better vehicle efficiency, vehicles can be saved. Also, staff can be freed up to focus on valuable work involving direct customer interaction.