This has been a challenging winter. In addition to the earthquakes and tsunamis in New Zealand and Japan, harsh winter storms throughout North America have been disruptive to the smooth flow of people, goods and services for many companies. Looking back over the past few years, hurricanes, volcanic eruptions and tornadoes have also made life difficult for supply chain professionals.

It may be several weeks or months before the full impact of the tsunami in Japan, from an economic or supply chain perspective, is understood. As the world’s third largest economy, the images of cars and houses being swept along by powerful waves signal that there is widespread damage. The closure of airports and ports could have significant consequences.

Of course, disruptions to supply chains can come from factors other than weather or natural disasters. Quality control problems, piracy and export restrictions are just some of the factors that can come into play. To make matters worse, most of these disruptions are unpredictable in timing and scope.

Each shipper has to make an assessment of the potential risks to their supply chains. According to Patthira Siriwan, senior project manager for supply chain development in North America for Damco, the combined logistics brand for A.P. Moller-Maersk, supply chain risks can be categorized into five groups: operational, social, natural, economy and political/legal. Damco defines supply chain risk management as “attempts to identify risks and quantify their commercial financial exposures as well as mitigate potential disruptions at each node and lane in the supply chain”.

Supply chain risk models can vary from the rudimentary to the sophisticated. In the case of the latter, complex “what if” analyses can be performed. This allows the shipper to identify potential trouble spots and map out alternative supply chain strategies. In a recent article in the Journal of Commerce, Siriwan indicated that shippers tend to focus on “factors with the biggest impact on their supply chain, such as on-time performance, supplier lead time variability and carriers by origin or trade lane”. Shippers need to perform some sort of probability analysis on the impacts of each potential disruption, with a particular focus on alternative vendors, carriers, origin points and ports and destination ports.

At the depths of the Great Recession, a barrel of crude oil cost $40. Last Friday, the number closed at over $104 U.S., with no relief in site. Michael Irvine of the Kent Group, a petroleum consulting firm expressed the view that it's not only the situation in Libya that's causing the spike in crude.  " It’s not as much related to the Middle East as many people would think, but more fundamentally on the basis of global crude oil demand having increased steadily for many months now.  Demand for crude oil globally is at, or higher than the pre-recessionary levels."

There is a direct inverse correlation between increases in oil costs and economic activity. According to new report on CBC News, for every $10 increase in the cost per barrel of crude oil, GDP decreases by 0.5% over the next 2 years. Journal of Commerce Economist Mario Moreno estimates that U.S. consumer spending growth, excluding gasoline and other energy, is reduced $11 billion, or one-tenth of a percentage point, for each 17 cents that average gasoline prices for all grades rise above $2.90 a gallon. If average gasoline prices reach $4 a gallon in the U.S., he forecasts consumer spending on non-fuel purchases would fall $60 billion or 6.5 percent.

Higher energy prices also reduce consumer confidence, a key component of sustained economic growth. A 4 percent rise in gasoline prices from December to January contributed to a drop in the Reuters/Michigan consumer sentiment index of 72.7, down 1.8, in mid-January.

Of course energy prices are not the only costs on the rise. Prices for other commodities such as copper, steel and aluminum have also been receiving an updraft. Recently there have numerous reports of dramatic increases in food prices, notably wheat. Some experts have suggested that the inability of people to feed their families in Egypt was a large contributor to overthrow of the Hosni Mubarak and has been a key factor in the turmoil in other countries in the region. Other reports indicate that U.S. housing prices may have hit bottom. This suggests that continuing cost increases in food, energy and housing may curtail or even derail economic growth.

This places freight transportation companies and shippers in a tough spot. For many years carriers have adopted fuel surcharge formulas that bear some relation to fluctuations in the cost of crude oil to help offset the rise in fuel costs. While there are some industry standards (e.g. Freight Carriers Association of Canada), there is a significant variance between the individual surcharges levied by each carrier and the energy efficiency of different modes and carriers within modes.

Thankfully business conditions are improving in 2011 and freight volumes are more robust than they have been the past couple of years. As reported in a previous blog, freight rates are increasing. Shippers are taking less of a “bunker mentality” and are now looking for ways to optimize their carrier networks.

For carrier sales personnel seeking to secure new accounts, success comes from a persistent effort or “skating without the puck”. Opportunities to secure new business may arise when you least expect it. A new supply chain leader may challenge the status quo, an acquisition or plant closure, the U.S parent taking control of Canadian and cross-border freight movements, a series of service failures, a disproportionately high rate increase or a host of other reasons may trigger a search for a new carrier or logistics provider.

The actual process of securing a new account can be an arduous one. Some shippers conduct elaborate multi-round RFP’s. In certain cases, carriers must demonstrate that they have the fleet size and quality of equipment, appropriate insurance and good safety records to even gain consideration. Securing new business can take a combination of competitive pricing, good selling skills, strong IT capabilities, a terminal tour and possibly a set of trial shipments. Any slip-up along the way - - - non-competitive pricing, a less than inspiring sales presentation, a botched terminal tour, no EDI communications or other missteps can derail the entire sales effort.

Throughout the process, the new carriers are being compared to the incumbents. It is a big decision to leave a long-standing business partner, particularly if the partner has performed well. The decision is much easier if the incumbents have slipped up on service and there is a price variance. It is much harder if the incumbents have a stellar service record.

For some shippers, there is uncertainty as to whether they are making the right decision in making a switch. A failure can trigger a complaint from a customer, customer service representative, sales person and/or higher management.

This past week I read an article entitled, “Not an Automatic Decision”, written by Eric Johnson that appears in the February issue of American Shipper. Since my company has been involved in numerous freight transportation e-procurement projects over the past seven years, I thought I would share my perspectives on this topic.

Mr. Johnson makes the point that e-procurement is widely used in certain modes (e.g. truckload transportation) but not as common in others (e.g. ocean freight and rail). He argues that “whether automated procurement is prevalent in a certain mode often boils down to a couple of key factors: the level of competition, and the strength of shippers versus their service providers. High levels of competition (re: fragmented markets with few key large players) and (buzzword alert) ‘substitute-ability’ are clear indicators that e-procurement acceptance levels will be high. Alternatively, in modes where a cadre of large players dictates how service contracts will be negotiated, e-procurement acceptance levels will be low.”

The term “automation” does not mean that the procurement process is managed without human intervention; Rather it means that a “company is using a substantial amount of technology to support its transportation buying process. . . Alternatively, ‘manual’ doesn’t mean the procurement process is managed without the use of computers, Internet access, or other fundamental business tools. It’s merely assumed that companies managing procurement manually employ spreadsheets and other tools”.

There are two levels of e-procurement. A shipper can use a variety of software based e-bidding tools (e.g. some designed for freight analysis and others of a more generic nature) to facilitate the process. The tools help standardize the information flow, perform the freight data analysis and provide a disciplined rate negotiation process. Large shippers with complex supply chains and significant inbound and outbound freight traffic may require a more sophisticated level of analysis that may involve optimizing rates for round trips, continuous moves, by mode and by region.

Neither LTL nor truckload transportation is not a pure commodity on any lane in North America. It is not a 2 inch by 4 inch by 6 inch widget that can be manufactured to the exact same specifications by a variety of suppliers. There are thousands of trucking companies in North America. Even in the transportation sector where e-procurement is most prevalent, truckload shipping, there are wide variances among the providers. These variances exist in multiple ways:

• Capacity
• Quality of fleet
• IT capabilities
• Customer service
• Insurance coverage
• Freight handling processes
• Attention to detail
• Safety
• Quality of management
• Head haul and backhaul requirements on individual lanes

Then there is the issue of modal options. For longer lengths of haul, intermodal service can become increasingly attractive from a rate perspective. But intermodal transit times are typically longer than road. Therefore, shippers comparing rates between road and rail options in an e-procurement environment are essentially comparing “apples” to “oranges”.

There are a number of signs that shippers may come under pressure for freight rate increases this year. An economic recovery is under way. Robust retail sales in the latter part of 2010 may result in some inventory restocking in the first quarter of 2011. This may increase the demand side of the curve. If the recovery has legs, there may be higher shipping volumes during the historically stronger second quarter.

Transportation companies are facing a number of pressures on the supply side. New hours of service regulations and CSA 2010 could reduce an already depleted driver work force. Despite the high unemployment levels, driver recruitment remains a challenge.

Trucking companies that were faced with excess equipment during the recession are exhibiting more caution in buying new tractors and trailers. Major carriers such as Schneider National and Con-Way Truckload have already indicated that they do not plan to make truck acquisitions other than replacements until there are clearer signs of a sustained economic upturn. The result is an expected capacity shortfall of 3 to 4 percent by mid 2011.

Another wild card is fuel prices. While diesel fuel prices have slipped back the last few days and are well off the pre-recession peak of $147 a barrel, the trend line appears to be upwards. This will drive fuel surcharge increases in all sectors of transportation.

This leads to the obvious conclusion that shippers may face increases in freight rates and fuel surcharges and the likelihood of a more aggressive implementation of accessorial charges in 2011. This comes at a time when shippers are trying to rebuild their businesses. What can shippers do to mitigate these possible rate increases? Here are a few ideas.