One of the latest struggles for businesses everywhere (even those that don’t sell physical products) is the rising cost of shipping and logistics. Everywhere you look around the globe, delivery takes longer and costs more than it used to.
What is actually driving these issues, and how can your company hedge against these cost surges without sacrificing quality? Let’s break down the data and look at practical strategies you can apply today.
Why are Shipping and Logistics Costs Rising?
Businesses like your corner produce store or neighborhood supermarket depend on global supply chains. If a ship gets stuck in a port or a truck takes too long to reach its destination, shelves will start getting empty and prices spike dramatically.
On the other hand, global supply chains depend on shipping and logistics running like clockwork. When a key trade route or major port gets disrupted, shipping gets slower and drastically more expensive. And the ones who feel the effects are businesses and final consumers.
But what type of events can disrupt worldwide supply chains? Everything from a global pandemic to security conflicts in key water passages and geopolitical friction (specifically shifting tariff policies between the major economies of the world).
For instance, the ongoing conflict in the Red Sea and Iran is impacting two major transportation routes. Because of this, transit routes get longer and more expensive (due to the added mileage), and businesses back home have to wait longer for their shipment to arrive.
How Are Businesses Being Impacted
Businesses on both ends of the logistics chain are taking the brunt of global instabilities. On the side of suppliers and transporters, it is increasingly difficult to build a sustainable logistics business from scratch. The barrier to entry has never been higher.
Between massive upfront equipment costs and sudden fuel price swings, new logistics startups simply don’t have the scale or cash reserves that global mega-carriers use to weather market shocks.
At the end of the supply chain are the shippers, or the regular commercial businesses (consumer brands, retailers, manufacturers, etc.). According to a recent industry report, the shippers lose around 8% of their annual revenue in operational friction, bloated inventory costs, and lost sales opportunities.
Overall, supply chain disruptions cause far more financial damage to regular businesses. A business can price in a known 20% freight rate increase, but a 14-day unexpected delivery delay that halts a factory line or ties up working capital in idle stock creates systemic financial losses that are much harder to manage.
What Businesses Can Do To Hedge The Costs
To manage unpredictable freight rates and severe transit delays, companies use a combination of risk-mitigation and budget-absorbing strategies and aggressive operational hacks.
Insurance to Protect High-Value Shipments
Shipping insurance is not a new concept. Risk protection for cargo dates back centuries to maritime law. Nowadays, shippers can also buy added protection for their cargo. In fact, there is a wide range of options, from last-mile package insurance to full-transit cargo policies covering weather damage, port theft, and unexpected freight delays.
For instance, a last-mile carrier like UPS offers standard carrier coverage that caps at $100 per package regardless of the lost value. To protect a higher-value shipment, you must declare its actual worth and pay an extra fee to bump up the liability limit.
Even so, this is not an insurance policy, but rather a cap on carrier liability. And, purchasing extra Declared Value directly from UPS gets expensive quickly for high-volume shippers. The true cost-management strategy is using third-party shipping insurance, which offers broader coverage at a fraction of the standard UPS insurance cost.
Increased Reliance on Buffer Stock
When it takes 10 to 14 days longer for shipments to arrive from Asia to Europe and vice versa, regular companies can no longer rely on lean, Just-in-Time inventory. Instead, they shift to a just-in-case scenario, where they keep 15% to 25% higher safety stock in local warehouses.
But holding extra stock locks up working capital. Businesses spend significantly more on warehouse real estate lease rates, insurance on stored inventory, and interest on credit lines used to finance that unsold inventory.
At the end of the day, businesses must choose between losing sales because of empty shelves or rising prices by investing in buffer stocks.
Near-Sourcing Critical Components
Also known as double sourcing, this practice helps companies make sure their most time-sensitive or high-margin components are not stuck in a port somewhere half around the world.
With this strategy, a business buys 80% of its total inventory from low-cost overseas suppliers (e.g., East Asia) and sources the remaining 20% from a nearshore supplier (e.g., Mexico for US firms, Eastern Europe/Turkey for EU firms).
A Matter of Strategy
The global shipping and logistics sector is going through a perfect storm that involves everything from post-pandemic imbalances to conflicts and economic tensions. Whether this storm will pass and what will be left behind, it remains to be seen.
Meanwhile, regular businesses everywhere must devise cost-cutting strategies and operational shifts to stay afloat.