Transportation costs (usually a fraction of the price of a finished product) appear to be another obstacle in the supply chain, overwhelming some companies that already pay more for raw materials and labor.
Fabric and craft retailer Jo-Ann Stores LLC said it has spent 10 times its historical cost in some cases to move products from one point to another.
“Sometimes ocean freight is actually more expensive than the cost of the product,” CEO Wade Miquelon said in a recent interview. The company has not raised any base prices and hopes the additional supply chain spending will be temporary. “I think they probably are, but does transient mean six months or 24 months?” ” he said.
The Covid-19 pandemic has resulted in a lasting increase in transport costs, putting pressure on many companies already facing higher wages and raw material prices. Some CEOs say they expect high transportation costs through 2023.
The cost of transporting goods is an element at every step of a company’s supply chain. Everything from iron ore and steel to parts and finished products must be moved as raw materials are processed as part of global manufacturing. The cost of shipping containers across the ocean is higher, truck drivers are scarce, and gasoline is more expensive than expected earlier this year.
“We don’t expect any hardware improvements in 2022, especially in the first part of the year,” Michael Witynski, CEO of discount retailer Dollar Tree Inc.,
said last month. He noted that experts expect maritime transport capacity to normalize no later than 2023.
According to the Freightos Baltic Index, cash container shipping rates from Asia to the west coast of the United States were five times higher last week compared to the same period last year. These rates are more than 14 times higher than the same period in 2019.
“It has just risen so rapidly that it is now part of the narrative here of this supply chain-induced price shock proving to be much more intense and much more lasting than we initially thought in the spring,” said Brian Coulton, chief economist at Fitch Ratings.
Mondelez International Inc.
said last week that global inflation was higher than expected, citing the costs of raw materials and transportation. Molson Coors Drink Co.
said most of its cost inflation came from increased transportation. Monday, 3M Co.
said he saw “a lot of pressure” on logistics costs.
French tire maker Michelin has spent tens of millions of dollars in additional costs to move natural rubber from the tropics to its production facilities to meet customer demand.
A double shortage of truckers and sea containers drove up the cost of transporting the company’s products, which for months were even shipped by air. The company only recently reduced its use of more expensive air freight and said its supply chain teams are constantly juggling transportation and shipping companies to get things done.
“That’s why we had to increase tire prices,” Michelin Managing Director Florent Menegaux said in a recent interview.
Procter & Gamble Co.
announced several price increases for products, including Pampers diapers this year, but executives have warned that the speed and scale of increases in freight and commodity costs are too large to be offset initially. The company expects additional after-tax costs of $ 1.9 billion in its current fiscal year, which ends in June 2022.
“The demand for trucks continues to increase every step of the way up to door-to-door delivery,” Jon Moeller, the company’s new CEO, told an investor conference in June. “Diesel fuel costs have increased by more than 25% compared to April 2020.”
Dollar Tree warned investors last month that freight market conditions continued to deteriorate and costs would be “considerably higher than initially expected.” The company previously expected its scheduled freight carriers to meet 85% of their contractual commitments, with the rest being shipped at market rates.
“However, we now expect our scheduled carriers to meet only 60% to 65% of their commitments, and spot market rates will be much higher than expected,” Witynski said in late August.
Dollar Tree said the problems stemmed from equipment shortages, backlogs, port blockades, labor shortages and complications related to Covid-19. A charter ship was recently denied entry to China because a crew member tested positive for Covid-19, forcing a two-month delay as the ship backtracked to replace its crew. In response, the company is using more domestic suppliers for cargo, making seasonal purchases a month earlier than usual, being flexible with arrival and departure ports, and using a dedicated space on chartered cargo ships, including one. for a period of three years.
After a decade of consolidation among shipping companies, a handful of companies dominate key routes. This means that there are generally fewer ships sailing between ports, forcing cargo owners to pay extra to find space. Both Walmart Inc.
and Home Depot Inc.
have decided to charter their own boats this year to transport goods.
The additional costs and adjustments that companies are warning investors about and working to preserve their profit margins are causing some economists to shrug their shoulders. The rebound in the economy, they said, has been accompanied by an increase in demand for goods, causing a short-term supply crisis that will subside over time as the rise prices will reduce demand.
“There is no price more transient than transport because capacity can rise and fall,” said Steven Blitz, chief US economist at TS Lombard. Trains can get longer, more ships can be built, and truck drivers can be hired to meet the demand for moving things, but it just takes a while. Like many economists, Blitz expects inflationary pressures to ease.
Inflation could also slow if the economy does the same. The spread of the Delta variant of Covid-19 is forcing businesses and consumers to adapt to renewed mask mandates, travel restrictions, event cancellations and delayed office reopens. Consumers are reducing their purchases and employers have slowed hiring.
“I think inflationary pressures are compounded by soaring transportation costs,” said Mark Zandi, chief economist at Moody’s Analytics. Using rough estimates, he said consumer prices rose 5.3% in the past year, and transportation costs contributed about 10% of that rise.
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“If everyone has to pay more to ship to the next producer down the chain, when you get to the end user, that’s a big part of the change,” he said.
Jm smucker Co.
recently pointed out transportation costs as a major reason for declining profitability, along with higher commodity costs. CFO Tucker Marshall said in late August that transportation costs were a challenge in the last fiscal year which continued into the current year.
“As you bring in equipment, produce and ship equipment, the entire network is affected from a transportation standpoint right now,” said Marshall. “And that’s material.”
—Emily Glazer and Sharon Terlep contributed to this article.
Write to Thomas Gryta at [email protected]
Corrections and amplifications
After a decade of consolidation among shipping companies, a handful of companies dominate key routes, meaning there are generally fewer ships sailing between ports. An earlier version of this article incorrectly said that consolidation led to smaller and smaller ships. (Corrected September 16)
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