Overcome high energy costs through lean logistics

By Thomas Cutler -- Industrial Distribution, 6/7/2007

While consumers are lamenting the prospect of $4-per-gallon prices at the pump, those within a complex supply chain are particularly worried. A spike of a few cents in costs at any point in the chain significantly affects how much it costs to bring a product to market.

Operating with paper thin margins, those logistics concerns have caused a reexamination of lean principles to squeeze out any possible productivity improvements and cost efficiencies.

Distributors are working overtime to develop more cost-effective processes and strategies to enable their customers on both ends of the supply chain to operate without incurring sizeable increases in transportation and logistics costs.

The scope of this challenge is significant. According to a recent study sponsored by the Council of Supply Chain Management Professionals (CSCMP), U.S. business logistics costs increased by 14 percent from the year before—to a total of $1.18 trillion total.

This increase represents the largest year-to-year change in more than 30 years, according to CSCMP, an organization which tracks trends in transportation, inventory-carrying and total logistics costs.

Several large manufacturers estimate that for every $1 increase in the price of a barrel of oil, its logistics costs go up by $4 million. As of this writing, rates have not yet hit the $77 levels of August 2006, but the going rate for a barrel of crude oil has returned to $65 or more versus $25 per barrel in 2001. Refining costs keep the price per gallon extremely high regardless of the exact per-barrel rate. No organization involved in logistics is free from the bottom-line impact of these higher rates.

“The impact of rising energy costs on the supply chain requires better methods than beating suppliers for cost reductions, which do not pay in the long run; and passing costs along to customers is not a viable option,” says Brian Devine, vice-president of ProLogistix Lean Personnel. “For distributors to keep margins and survive, these much higher energy costs require a commitment to continued process improvement and lean principle.”

While even the most skilled logistics professionals cannot avoid passing on a portion of mounting fuel surcharges to customers, distributors can arm themselves with staffing expertise to mitigate the increased costs.

Optimizing your routing selection requires experienced lean logistics professionals and represents an opportunity for significant cost savings. For example, inexperienced staffers might have flown an order to achieve on-time delivery, when the same result could have been achieved by hiring a driver to transport the package overnight—for a tenth the cost of air.

Experienced logistics people are able to recommend ways in which distributors can consolidate their shipments and use more cost-effective transportation alternatives to reduce spending related to fuel charges.

“[We can] help our customers by placing strategic logistics experts who are able to interpret the information which accumulates in ordering behavior, often uncovering purchasing patterns that lend themselves to substantial money-saving techniques,” says Devine. “Logistics professionals have already learned from their mistakes … and their experience and knowledge translates into continuing process improvement.”

When lean logistics professionals perform an account review, it often reveals that a customer’s embedded release program automatically schedules orders based on preset production-requirement parameters—parameters that allow for the consolidating of shipments.

Bypassing the embedded instructions can still enable customers to get everything they need, when they need it, but with a single freight cost rather than multiple shipments.

It is said that necessity is the mother of invention. Rising fuel costs are necessitating that distributors develop new methods to reduce costs that will benefit the supply chain in the future regardless of the price per barrel.

Thomas Cutler is president & CEO of TR Cutler, a Ft. Lauderdale, Fla.-based manufacturing and marketing firm. He can be contacted at trcutler@trcutlerinc.com.