Using the provided article, answer the following question:

Name the major forces that influence carrier pricing strategies. Feel free to share your personal experiences with shipping costs. (as a consumer)

High transportation costs are driving three main shifts in supply chain strategies. These changes are having a beneficial impact not just on transportation budgets but also on broader supply chain and financial performance.

During the 1990s and the first part of the 21st century, the high availability and low cost of transportation services relative to the cost of holding inventory encouraged organizations to emphasize fast, frequent delivery to customers through such means as just-in-time delivery. But things have changed dramatically in the last decade, and companies increasingly are calling such long-standing strategies into question. The "game changers" are volatile, escalating oil prices and an imbalance of supply and demand for freight transport services. These realities have led to high transportation costshigh enough to cause companies to make transport-driven shifts in their supply chain strategies.

Three such shifts are having a notable impact today. The first is a shift from offshoring to nearshoring sourcing strategies in an effort to reduce the number of miles shipments travel. The second is a shift from designing products and packaging for marketability and more efficient production toward designs that also incorporate "shipability" considerations. These include: customizing packaging for individual products' sizes and dimensions for space efficiency and easy handling; providing protection of goods in transit; and facilitating multiple processes of offloading, repackaging, and reloading. The third is a shift from lean inventory strategies to hybrid lean inventory/transportation strategies.

Shift 2. From product and package designs for marketability and production toward designs that also incorporate "shipability" considerations

Observations: Many companies are revising package and product designs to reduce weight and increase shipment density. For instance, some have reformulated such products as laundry detergent, dishwashing liquid, dairy powder, and fruit juice to make them concentrated and physically more compact. Some manufacturers have redesigned rolled consumer products like aluminum foil and toilet paper so that the cardboard tube in the center is smaller, or they have even eliminated the tube altogether.

Like the products themselves, packaging is being redesigned to optimize package size and weight for the contents through package reconfiguration, the use of lighter-weight materials, and the elimination of unnecessary packaging layers, such as outer cartons and shrink-wrap film. More products in lighter, smaller package sizes are appearing in retail stores. There are many examples of this trend. The manufacturers of Windex and Method cleaning products, for instance, have introduced refills in flexible pouches, as opposed to the traditional hard-plastic bottles. Rag and Bertolli now offer pasta sauces in flexible pouches as well as in the typical glass and plastic jars, and many manufacturers package soup in aseptic cartons in addition to metal cans. They are far from alone: According to a Grocery Manufacturers Association survey of its members, the number of packaging improvements implemented by companies in the consumer products industry has been increasing each year, resulting in more than 1.5 billion pounds of packaging avoided from 2005 to 2010.5

Supply chain impact: This "don't ship air, don't ship water" approach to package and product design helps to reduce shipping weight, size, and materials while maintaining the products' appeal and convenience for consumers. These changes translate into savings in freight costs, packaging costs, and space utilization.

Financial impact: Freight costs are reduced because the reduction in package size and weight, as well as the use of fewer packing materials, allow more goods to be shipped in one truck, container, or other conveyance. Moreover, a larger number of smaller-size containers, such as those described above, can fit within a manufacturer's allotted retail shelf space. Thus, revenue is enhanced through better utilization of valuable shelf space.

Shift 3: From lean inventory strategies to lean inventory-transport hybrid strategies

Observation: Lean theory and practice, which seek to reduce inventory costs, evolved back when oil, which accounts for 98 percent of energy consumption in transportation, was around US $25 per barrel. Common transportation strategies of companies that implement lean principles include just-in-time delivery; small, fast, and frequent shipments; and using a dedicated fleetall of which depend on cheap transportation. However, as oil prices escalate, the importance of transportation economies of scale (achieved by making larger and less-frequent shipments) increases, and trade-offs between inventory and transportation costs become more important.6 As a result, companies have shifted to inventory/transport hybrid strategies that not only focus on safety-stock and cycle-stock policies but also consider the benefits of lower transportation costs.

A number of popular techniques corresponding to this shift have emerged. First, shippers are paying closer attention than ever to shipment consolidation. They are examining their own shipping patterns to find opportunities to consolidate their shipments, and are considering potential leverage to be gained from using a third-party logistics provider (3PL) as a matchmaker for shipments along shared routes. Second, they also are focusing on building consolidated, multiproduct containers, pallets, or cartons to optimize capacity utilization. And finally, shippers are becoming more astute in evaluating alternative modes of transportation to cope with high transportation costs. This means looking increasingly to intermodal rail services, instead of trucking services, for long-haul freight.7

Supply chain impact: These shifts toward shipment consolidation reflect lean inventory/transportation hybrid strategies in which lower transportation costs offset increased inventory carrying costs. Shipping larger loads translates into higher levels of inventory on hand, and the longer transit times associated with intermodal rail versus truck mean higher costs for in-transit inventory and safety stock. But these inventory-cost increases are offset by freight-cost reductions achieved through improved shipment economies, fewer empty runs, and better vehicle utilization.

Financial impact: Freight-cost reduction is made possible by trading off marginal transportation costs for inventory holding costs. At the same time, revenue is enhanced because more inventory is readily available to fill orders with shorter lead times. The substitution of inventory for transportation costs by no means suggests that inventory will become a less significant factor influencing total logistics costs. On the contrary, these hybrid strategies emphasize balancing the cost of transportation and the cost of carrying inventory, which includes interest, taxes, obsolescence, depreciation, and insurance. The fact that interest rates have followed a downward trend since the middle of 2000 and have remained essentially unchanged since 2008 contributes favorably to this shift in supply chain strategies.8

Key takeaways

In this article, we observe and highlight three shifts in supply chain strategy in response to higher costs of transportation. Based on this exercise, we underscore that those strategic shifts represent the manifestation of a renewed focus on the long-established principles of transportation management that distance, density, and shipment size are key drivers of transportation costs.

In considering distance, logistics and supply chain managers are exhibiting renewed interest in the extent to which components and finished goods travel along the supply chain. Sourcing strategies that focus on pursuing low costs for labor and raw materials from overseas sources have given way to strategies that consider sources in closer geographic proximity in order to reduce distance-driven transportation costs.

In terms of shipment density, previously overlooked density-dampening factors, such as unfilled space within packages (air) and volume-adding ingredients (water), have lately drawn shippers' attention relative to the impact they have on transportation costs. Managers now strive to avoid paying to ship air and water by focusing more on the designs of products and packaging for shipability, as opposed to designs for marketability and production alone.

Shippers are also controlling shipment size to reduce per-unit transportation costs. The widely practiced lean inventory approach favors minimizing inventory costs at the expense of transportation costs, due to the requirement for small and frequent shipments. In an environment where transportation costs are high, however, managers have become more astute in regard to shipment size, migrating from lean inventory to a hybrid transport/inventory strategy. They engage in freight consolidation (either among their own business units or by leveraging third parties), and select transportation modes that facilitate less-frequent, larger shipments of freight when it is appropriate.

While the direct benefits of the strategic shifts outlined in this article target reduced transportation costs, we articulate through the lenses of the Strategic Profit Model9 in Figure 3 that they also favorably contribute to other factors impacting supply chain and corporate financial performance (see Figure 4). Considering the long-established principles in transportation management through this new light, we recommend three simple rules for managers who are navigating the continuing challenges of high oil prices and transport service constraints: count the miles; don't ship air and water; and consolidate, consolidate, consolidate.