Chemical shippers, carriers still feel the pinch

Karen Prema -- Purchasing, 10/6/2005

Logistics managers and buyers at chemical companies say they are at a dead end, and running in circles due to high fuel costs and tight transportation capacity. But industry experts warn that chemical shippers need to be aware of other components to their increasing costs.

Tight truck and rail capacity, in-creased fuel and energy costs and growing chemicals demand is adding up to major rate increases in the bulk logistics modes. For instance, with capacity tightening, railroads are focusing most on high-volume container traffic, and less on bulk traffic. And the less desirable freight is to carriers, the more expensive it is to shippers. Trucking capacity is also tight because carriers are short of drivers and other modes besides bulk get more attention because they produce higher profits for carriers.

Warren Casely, director of global supply chain for General Chemical in Parsippany, N.J., is predicting little change in the market dynamics heading into 2006 and is preparing for it. Although Casely has been able to fix some contracts with caps on fuel prices, he says General Chemical is still dealing with the cost associated with tight capacity in bulk-rail and truck. Rail capacity, which General Chemical predominately uses, is the most problematic it has been in years for shippers, says Casely.

As a result of these market dynamics, General Chemical has pulled back on its logistics outsourcing strategy and now handles all logistics in-house. The logistics department was facing an extra layer of billing issues and felt third-party providers offered no financial gain to the company. As the company evaluated its cost vs. service more closely in all areas, the value it was getting from its third-party providers was one of the areas the company decided to cut back in.

"I understand why a traffic manager for a chemical company would be frustrated right now," says George Grossardt, vice president and general manager of Schneider National Bulk Carriers, who says changing providers for reduced cost is not the only answer. "My advice to bulk shippers is to get a good solid relationship with their providers. In my previous role purchasing transportation, I used the rule of thumb that in order to change out my current incumbent provider, I need at least a 2% cost advantage to make it worthwhile."

Another deterrent to switching carriers for chemical shippers is the risk of poor or even dangerous service. "No chemical shipper wants a leak, spill or accident with their product on the equipment." Grossardt adds that when shippers change carriers, the new carrier may not be familiar with the company's processes and requirements. This introduces not only a potential cost risk, but an environmental and community risk. "The deeper you can make your relationship and work on lowering the total cost, that's the better approach right now in the marketplace than going out and bidding to try to get the lowest rate."

Grossardt points out that fuel prices are beyond the carrier's control and should not be a factor in switching providers. Despite that, he says Schneider works with shippers to minimize the impact. First and foremost, since Schneider has its own operating centers throughout the country, its fuel supply is assured. And, like every competitor, it has a fuel surcharge program to offset increases in fuel. However, a fuel surcharge program may not help shippers or carriers recuperate such substantial run-ups in such a short period of time, he says.

And buyers of bulk trucking services may be in for another round of price hikes down the road. Stricter U.S. Environmental Protection Agency requirements are causing carriers like Schneider to buy new engines where he notices that they are not as fuel efficient as the old machines. This hikes up fuel costs.

"The equipment isn't as efficient in terms of burning fuel so, ultimately, that cost is going to get passed on to shippers," says Grossardt. The company tries to buy the most fuel-efficient equipment that it can, given the state of technology out there today within industry standards.

Schneider is looking into other areas to lower costs. He says with fuel as high as it is today, Schneider is looking at in-cab air conditioning or heating units to minimize the idling drivers do to keep warm or cool. Controlling idle time holds some promise, but Schneider is still experimenting. "There are increased costs just to get the unit, so we are looking at that as an option to lower your overall total cost."