The Department for Transport has recently published its annual Road Freight Transport Statistics Bulletin 2009, and interpreting the figures provides a fascinating analysis of the changes occurring in the Distribution Sector. This year’s publication is significant in that not only does it show the impact of recession when compared with 2008, but also as the 20^th edition, showing the fundamental changes over two decades.

Unsurprisingly, total tonnage uplifted declined markedly in 2009 compared to the previous year, but the balance of goods moved between different sectors has continued recent trends.  The volume of food and drink products has been at a stable 370 million tonnes for three years, after a fairly constant upward trend, whereas all other categories declined, noticeably Bulk Products, which fell from 620 million tonnes to 440 million tonnes year on year. Perhaps worryingly for British Manufacturing, this compares with levels of over 600 million tonnes being uplifted in this sector even during the recession years of the early nineteen nineties.

Analysis of usage by vehicle type shows artics moving 58% of goods compared to just 40% in 1989.  Not only does this show the impact of increased vehicle weights on improving efficiencies, but also goes some way to explain why unit haulage rates have failed to keep pace with inflation, whilst still allowing haulage businesses to continue.

However, from a cost analysts’ perspective, the most interesting statistic must be the change in the proportion of goods being moved by own-account vehicles versus 3^rd party hire and reward hauliers. In 1989, hire and reward operators uplifted 60% of goods (by weight), declining slightly to 57% in 1991 as the recession bit. However, with a trend for more companies outsourcing logistics functions, this then peaked to 67% in 2001. A gradual decline to 61% in 2007 has then been followed by big drops to 51% in 2009. Actual volumes for the hire and reward centre have dropped from a peak of 1,145m tonnes in 2007 to just 723m tonnes in 2009 – a 47% drop ! Undoubtedly, the impact has been large numbers of providers disappearing from the scene with record administrations and insolvencies in the sector, and the survivors following rigorous cost cutting programmes and capacity reductions. For the future, however, from the service procurors perspective, this means reduced competition as hopefully volumes begin to recover.

Although the own account sector suffered a small volume reduction to 699 million tonnes, this was still the third highest volume moved in this sector since 1989. However, the sector moved its goods further than any previous year and therefore recorded its highest ever tonne kilometre measure. The re-emergence of the own account sector must be a relief to suppliers of fleet services: our internal data shows that margins charged on fleet supplies (eg fuel, tyres, maintenance, fleet insurance, etc.) are consistently higher than being achieved by the same suppliers to the hire and reward sector.

Therefore, despite the fact that own account operators are working their fleets harder, there are still major opportunities to improve their cost base through detailed effective procurement reviews.

“Apart from the financial rewards of reducing expenditure, our work with Neill Summerfield and his team in securing service level agreements and key performance indicators from suppliers has encouraged people within the Academy to be more focused on working pro-actively to ensure that we receive the best possible service from our supplier base”

Importantly the decision to engage Neill Summerfield and his team of cost management consultants was supported by the Executive Management Board and the Board of Trustees. Progress in finding sustainable extra profits for the RAD is reported to both teams on a monthly basis.

Price inflation in some of the key operating costs for Logistics service providers is manifesting in price increases to customers.  Coupled with this, providers are becoming more inclined to push for these increases in some markets because the recession has taken a lot of capacity out of provision, and the continuing lack of readily available investment capital is constraining any growth in physical provision.

For example, there have been numerous reports in recent weeks heralding the return of pre-crisis, global trading activity. Indeed, two key airports, Hong Kong and Frankfurt, have reported record monthly Air Cargo volumes in May with year on year growth at around the 40% mark. It is also anticipated that Ocean Container import volumes into the USA for 2010 will match 2008 levels. While this news is encouraging for the global economy and, in particular, Asian markets, where confidence is growing, there still remains uncertainty around economic prospects in the European and US markets. For cargo shippers this means that it is as important as ever to review transport expenditure. Focus on improving service and rates while some capacity is still available makes great sense. Action now will also make dealing with the impact of potential capacity constraints in the future that much easier to manage.

Within the UK, anecdotal evidence from what we would regard as upper tier (in terms of service capability) providers indicates that they have been busier in the first half of 2010 than has been the case for many years. Similarly, although new LGV registrations have still not recovered, trailer manufacturers are reporting significantly fuller order books, and some are investing in additional manufacturing capacity. Ironically, although one trailer manufacturer is currently reporting that their UK facility is under threat because of overall reduced demand across Europe, the UK plant’s domestic order book is now significantly higher than this time last year.

Undoubtedly, the web has caused a major change in distribution patterns. The knock-on effect is that both client companies and logistics providers are having to learn to adapt at a faster rate than ever, and some are more successful in this than others. Consequently, although pricing from incumbent suppliers may be competitive for your business profile 12 months ago, that may no longer be the case. Not only are providers having to change, but purchaser’s staff need to build new levels of market knowledge as to who is providing what, and who can meet their needs competitively going forward.

The one sector of the Logistics business where we are seeing increased capacity availability within the UK is Warehousing. Our Logistics Team held their quarterly meeting in the North Midlands last week, and remarked on the availability of vacant properties on what has been regarded as one of the prime distribution estates for several years.  Despite the best efforts of property agents, travelling around the country, we cannot fail to see the proliferation of properties to let.  Even in those areas of previously insatiable demand in the golden triangle, properties lie vacant.  The availability of warehousing property is in our view a reflection of the overall depressed demand for storage and handling facilities. Our dealings with full-service providers also shows that many are finding they have more free space on offer.

Stock costs money both in terms of cash flow and storage costs.  The better organisations are actively managing stock levels and, as a minimum, ensuring that they mirror any downturn in sales, aided by sophisticated I.T. packages that allow total visibility of stock and demand throughout the supply chain.

The implications of this are that, for those looking to acquire property or already in situ, rents should remain competitive to attract and retain tenants. Shorter term lease commitments and attractive rental rates are available with the opportunity for further negotiation.

For those who have contracted out their warehousing and storage activity, or looking to change distribution networks, or even flex capacity to reflect growth demands without capital commitment, storage and handling rates remain competitive.  However the main message for these companies is that they should ensure that any storage arrangement is flexible with no long term commitments that may not match the future needs of their business.

The consequences are that:

1/ The net cost of the bio element in mixes (for eg, normal pump diesel already includes up to 5% bio) is increasingly dramatically, as a result of the reduced duty rate being withdrawn, and,

2/ The wholesale costs of the bio elements (known as FAME in the trade) are rising faster than mineral based fuels, because the legislation requiring the minimum percentage is European wide, and market traders are taking advantage of a possible supply shortage.

Fuel oil suppliers are being very cagey on the final impact on prices, but based on wholesale market prices at the beginning of March, the combined effect of market rates plus duty subsidy removal willequate to an additional 1.5 pence per litre on pump prices over the official duty increase due on 1^st April.

General market commentary is fairly unanimous that fuel oil prices will rise significantly anyway this year, as the far-eastern economies begin further economic growth. Combined with all the legislative and duty changes on the 1^st April, we can look forward to fuel costs being significantly higher by the year end.

Mitigation measures, whether through technology, modifiying driver behavious, or smarter purchasing will no doubt become of greater priority as the increase bite !

1. Start by reviewing your direct energy costs, your travel costs and then your indirect supplier costs. You could even extend this further to consider carbon embodied in materials you use.

2. Review your direct energy use – electricity, gas and heating fuel. Identify the areas of greatest usage in your organisation and those which have the highest impact in terms of cost and/or carbon footprint. Use this information to determine the priority for a more detailed review.

3. Assess the usage patterns identified from this data and consider whether they pass the ‘make sense test’. Are seasonal/weekday/hourly/ day vs night variations as you would expect for your business? If not, why not?

a) Is equipment being left on unnecessarily?

b) Is start up and/or shutdown as you would expect?

4. Conduct a detailed site survey to determine which equipment or processes are the most energy-hungry. Consider the following questions:

a) Is that equipment turned off when not in use?

b) Is it energy efficient – by design, maintenance and how it’s used?

c) Is it fit for purpose?

5. Review your organisation’s processes:

a) Would it be possible to cut out any stages in the process without affecting quality?

b) Can the amount of re-work be reduced by improving quality checking?

c) How can your processes be redesigned to improve efficiency?

6. Consider your organisation’s culture:

a) Is your Energy Policy clear and understood by all employees?

b) Is this reflected in their personal targets?

c) Do you have Energy Champions to provide a readily-accessible source of expertise?

d) What do you need to do to encourage all staff to take this seriously and reduce energy consumption wherever they can?

e) Do you have a highly visible and well-used staff suggestion scheme? They will probably have some great ideas about where savings could be found.

7. Consider your organisation’s equipment maintenance and replacement policy:

a) Ensure that energy efficiency is a key element in decision-making regarding replacement kit.

b) Be aware of the whole-of-life costs of any piece of equipment. Do increased energy costs outweigh purchase cost savings?

c) Can existing equipment be made more energy efficient without having to completely replace it?

d) Ensure that equipment is well-maintained, which will keep it more energy efficient as well as prolonging its life.

8. Consider your travel policy:

a) How much do you spend on business travel each year? Include costs such as car leasing, parking, fuel, insurance, air travel and travel management costs.

b) How could these costs be better managed to generate cost reductions? Eg would it be better to have a pool car or company bicycles than company cars?

c) Are all journeys necessary? Could some face-to-face meetings be held using telephone or video conferencing instead? The supporting technology is improving all the time – if you were to reduce the number of business trips by 25%, how much difference would that make in terms of cost reduction and carbon emissions? This is exactly what Vodafone has done, resulting in double digit millions of cost savings. (Source: Tandberg case study)

9. Consider your distribution channels:

a) Do you need to distribute a physical product?

b) Can you reduce the number of journeys or organise them in such a way as to reduce the number of miles travelled?

c) Is the vehicle fleet fuel efficient?

d) Can you minimise packaging and the size of containers without damaging your goods?

10. Consider how you could encourage your suppliers to manage their energy use in a similar way. If this leads to cost reductions for them, they will be able to pass some of this on to you, creating a virtuous circle of benefit.

This is just a small number of suggestions to get you started. There are plenty of things you can action on your own, but if you would like some specialist help, please do give me a call.