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How Fuel Costs Affect Logistics Strategies

Report Issued by the NAIOP Research Foundation

WASHINGTON, D.C. – Today’s high oil and fuel prices are spurring companies to reevaluate their supply chains and distribution networks in a quest to find offsetting costs savings, says a new report, How Fuel Costs Affect Logistics Strategies, released by the NAIOP Research Foundation.

The report says that the already high – and rising – prices of oil and fuel will not materially increase the demand for distribution centers (DCs) in order to reduce the average distance between such facilities and their customer destinations, countering what other supply chain experts have reported. Instead, this study shows that optimal solutions involve little more than minor tweaks, such as adding one or two DCs to the supply chain network or repositioning DCs in different cities.

A trend of note is the design of optimized distribution networks. The report says that many companies are examining trade lanes in search of those where they can aggregate shipments and then move them as full containers or truckloads, as shipping full loads costs a fraction of the cost of shipping less-than-full loads. In many cases, companies are finding that the best way to build full loads is to add a freight-pooling hub to their supply chains.

Also called mixing centers, these hub facilities can be both consolidation centers and deconsolidation centers. It’s important to note that the report says the hubs are added only if the cost savings resulting from shipping the full containers or full truckloads created in the facility exceed the incremental costs of operating the facility itself.

The report highlights two reasons why companies are reluctant to make major adjustments to their distribution networks:

  1. To a large extent, freight miles and fuel consumption efficiencies are offset by higher operating costs. Adding additional distribution facilities to networks shortens the average distance traveled by outbound shipments to final destinations, but adds to operating expenses. In some cases, the cost savings in freight transportation from adding the extra facilities will be counterbalanced by higher expenses to operate the facility and the increased carrying-costs for the higher aggregate level of inventories.
  2. Additional warehouse workers must be hired, and each new facility entails incremental occupancy costs for leasing, utilities, maintenance and local taxes.

Insofar as companies were to add DCs to their networks, they would also end up with larger total inventories. That is, the larger the number of DCs:

  • the smaller the geographic region served by each one;
  • the less often the Law of Large Numbers will succeed in smoothing out random fluctuations in demand within each region;
  • the larger the safety stock that each DC must carry to avoid stock-outs; and
  • the larger the aggregate inventory that the enterprise must carry.

Another primary reason why so few companies have had to make major changes in their distribution networks is that they have many other cost-cutting measures to adopt. A number of the more popular measures are discussed in the full report. Some are fairly straight-forward such as:

  • packing more items into trucks to reduce their unused capacity
  • re-negotiating with carriers for lower freight rates or surcharges
  • working with carriers to become a preferred customer

Other strategies are more complicated and costly, such as:

  • implementing new software to gain enhanced visibility into their supply chains
  • establishing close collaborations with suppliers or even competitors

To access the full report, please visit the NAIOP Research Foundation or contact Kathryn Hamilton at 703-904-7100 or hamilton@naiop.org  

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About the NAIOP Research Foundation: The NAIOP Research Foundation was established in 2000 as a 501(c)(3) organization to support the work of individuals and organizations engaged in real estate development, investment and operations. The Foundation’s core purpose is to provide these individuals and organizations with the highest level of research information on how real properties, especially office, industrial, retail and mixed-use properties, impact and benefit communities throughout North America. For more information on how to contribute or for complimentary research reports, visit www.naioprf.org.

MEDIA CONTACT:
Kathryn Hamilton
703-904-7100
hamilton@naiop.org