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Businesses Scramble To Offset Rising Cost Of Transportation - WSJ

Businesses Scramble To Offset Rising Cost Of Transportation
By JUSTIN LAHART
June 30, 2008

Every day, planes filled with fresh flowers from Ecuador and Colombia land at Miami International Airport, where the flowers are transferred to refrigerated trucks cooled to 34 to 36 degrees. Two-person teams of drivers race through the U.S., stopping only to drop off flowers at wholesalers.

The operation, designed to get flowers from the South American highlands to American flower shops as quickly as possible, was a better business before fuel costs surged.

"Last year this time, we were paying about $19 a box to bring flowers to Miami," says Victor Giorgini, president of Miami-based Equiflor Corp., which imports more than 100 million roses a year. "Right now we're paying in the neighborhood of $28. It's hurt us a lot -- it's eroding profits."

Since the mid-1980s, U.S. businesses that rely on quick delivery for time-sensitive products -- from sushi restaurants to flower shops to manufacturers that use just-in-time delivery strategies -- have benefited from inexpensive transportation costs. Now, with oil closing at a record $140.21 a barrel on Friday, those businesses are being hit hard.

Over time, the increasing expense of moving goods could lead to a broad restructuring in the way America conducts commerce. But for now, businesses pinched by lower profits are just looking for ways to survive, from raising prices to forming alliances with local producers.

The entire economy is a bit like someone who bought a big sport-utility vehicle at the beginning of last year, when gasoline cost around $2.25 a gallon, says Morgan Stanley economist Richard Berner. Now the driver is stuck with a gas guzzler he can't afford to unload yet.

Just as the SUV owner will eventually switch to another car, U.S. businesses will find ways to cut their transportation bill. But it will take time.

Indeed, low transportation costs are a big part of what has made globalization possible. "We fly across the Pacific Ocean with all these components," says Mr. Berner. "It's still maybe profitable to do that, but the equation has changed."

Some of the fish that Denver-based Sushi Den uses is shipped from the Nagahama fish market in southern Japan. In the past three months, the cost of doing that has risen 15%, says founder Yasu Kizaki. "We basically have to pass on that increase to the customers," he says.

Bob Mosey, owner of Moseys' Production Machinists in Anaheim, Calif., which makes machined components for aerospace, laser, medical-technology and oil-drilling equipment manufacturers, also is feeling the effects of higher transportation costs. Companies that sell him metal have been slapping on fuel surcharges. Meanwhile, his 10-year-old truck, which he uses to deliver parts to local customers, gets just six or seven miles to the gallon.

On the other hand, he says, some U.S. manufacturers that used to buy most of their components from Asia -- goods that have become more expensive because of higher transportation costs -- now are more interested in U.S.-made components. "I'm hearing some customers still waving the China flag," says Mr. Mosey. "I hear others saying, 'We're bringing stuff back.'"

For many other U.S. businesses, there is no upside. Timothy Northrup's company is one of them. From his Northrup Gallery in Oneonta, N.Y., he sells furniture -- both direct from the factory and antique -- mostly through eBay.

When the price of shipping began to rise, he absorbed some of the cost increases. Now he is starting to pass them on to customers, who often blanch when they hear how much they will have to pay.

"Anything that has to get on a truck and get somewhere, it's going to affect the price and it has," he says. "I've lost deals because the freight is just too high."

Businesses are doing what they can to reduce costs. In an effort to shave fuel use, U.S. trucking firms have reset the governors on their trucks to so they can't exceed a certain speed and air-cargo carriers are washing plane engines more often. But there are bigger changes yet to come, thinks Rick Schwein, senior vice president of Minneapolis-based Grain Millers Inc.

"Our society has been built on cheap energy, which means low-cost transportation," he says. "We very possibly will enter an era where we restructure manufacturing distribution. As opposed to large processing plants distributing any type of product nationwide, we'll have more regional processing centers working on a smaller scale."

Wheat millers already are beginning to do that, he says, forging relationships with local farmers and looking to distribute their products closer to home. Grain Millers, as one of only a handful of oat millers operating nationally, doesn't have that luxury. The company, however, is working with trucking companies to ensure that when delivery trucks bring them a load of raw oats, they also leave with a load of milled oats. That saves on fuel costs by reducing the miles trucks drive unloaded, or "deadhead."

Lee Klass, an independent trucker working out of Portland, Ore., who says he will haul "anything that doesn't moo or cluck or glow in the dark," is using the same tactic. "I'm doing everything I can to keep my deadhead as low as possible," he says. "There was a time I might have gone 200 or 300 miles to pick up a load. I don't do that anymore."

But because so much manufacturing moved overseas, cutting back trips without cargo isn't as easy at it used to be. Through the 1990s, if Mr. Klass unloaded in Knoxville, Tenn., he might pick up a load of television sets in nearby Greeneville. Now, Greeneville's television business is gone.

Early this week, Mr. Klass will be hauling 20,000 pounds of potato chips from Salem, Ore., to Salt Lake City. His 1999 Freightliner gets six miles to the gallon. At today's diesel prices, the fuel for the trip will cost more than $650. Five years ago, it would have cost a little over $200.

By tejasmarcos on Jun 30, 2008, 04:59 in Friendly Talkzone.

tejasmarcos says on Jun 30, 2008, 05:01:

this explains the other side of the coin once the flowers arrive from Colombia. speculators are doing damage not only to the Colombian peso, but to almost all business around the world including the USA as this article describes.

trying to walk a straight line on sour mash and cheap wine...

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viajero123 says on Jun 30, 2008, 05:20:

That is assuming that the rising oil prices are due mostly to speculators. But a big part of the rise is happening because some fast growing developing countries, especially China and India, are demanding more and more oil. They are imitating many American habits, like having car-based, energy-intensive cities and industries.

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miamimike says on Jun 30, 2008, 06:52:

A Buddy of mine is severely affected, good and bad, rising fuel costs and a weak dollar. He is a Independent Logger who owns his own Log Truck Rig and he tells me on one hand last year, due to the weak dollar and strong Asian Export Market for Prime Pennsylvania Black Cherry Hardwood, he has never made more money in his life then he did last year. OTH, due to high Diesel Prices, it has never cost him more then now for Diesel Fuel for his Truck, which gets 4 mpg if he is lucky. And many days he drives easily 200 miles daily depending on how many trips he makes during his 12 hour day.Now he easily spends $200+ for Diesel daily.

"Wait a minute. What did you just say? You're predicting $4-a-gallon gas? That's interesting. I hadn't heard that." -- Feb. 28, 2008 --George W. Bush, Washington, D.C.

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tejasmarcos says on Jun 30, 2008, 08:25:

no wonder exxon/mobile recorded their highest profit in history last year. this year will be another record setting year for them and OPEC suppliers.

trying to walk a straight line on sour mash and cheap wine...

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miamimike says on Jun 30, 2008, 08:43:

There is a big push for Drilling offshore here in Florida while, OTH, there are reportedly some 10,000 Open Drilling Permits within the USA. One has to wonder why Oil is NOT being drilled for where these 10,000 open permits exist. Especially at Today's Record high Crude prices. In this same area of Penna where my Buddy hauls Logs, Oil&Gas Exploaration is going crazy as They cannot find enough experienced Oil Field workers. This area is approx 40 miles NE of Oil City, Pa. Home of Pennsylvania's First oil Well and Kendall, Pennzoil and Quaker state own a lot of these Old wells where much of the oil is still in the ground.

"Wait a minute. What did you just say? You're predicting $4-a-gallon gas? That's interesting. I hadn't heard that." -- Feb. 28, 2008 --George W. Bush, Washington, D.C.

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Tinto (Moderator) says on Jun 30, 2008, 09:37:

MiamiMike, you half-way answered your own question about the 10,000 permits. There is a shortage of skilled labor and a shortage of drilling rigs. If you CAN buy or lease a rig, the costs have sky-rocketed. The profits of oil producers large and small would be far higher today if there wasn't such a cost squeeze.

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miamimike says on Jun 30, 2008, 21:42:

Not really Tinto! If there is such a shortage why are the Bush administration shills&lemmings crowing about "We Gotta drill offshore" to lower Gas prices when anyone with a thimble of common sense knows drilling offshore has absolutely no relation to lower fuel prices in the near future. Its Nice Pre- election Spin BS but unfounded by Fact! BTW,, Deep Offshore Drilling is much more expensive then drilling on flat land so if any new drilling is pursued at all, it would be a prudent to drill onshore where the majority of these 10,000 open permits are and not clamor for expensive offshore drilling. Makes no sense at all, whether there is a shortage of Skilled Oil Field Workers or not, to drill Offshore when plenty of Petro exists in many these open permitted wells. Today there are pressure injection methods to extract a lot of Oil left in these first generation Oil Wells and these methods are much much cheaper then drilling new wells, either offshore or on land,,,I wasn't aware that Exxon Mobil was operating under a cost squeeze when they can pay their CEO Million of USD$$$ in annnual salary and multi million dollar pensions and Bonuses. That simply doesn't add up or 2+ 2 therefore doesn't =4.

Exxon CEO Salary/Bonus

"Exxon Mobil gives CEO $3.36M cash bonus NEW YORK (AP) - Exxon Mobil Corp., the world's largest publicly traded oil
company, has awarded Chairman and Chief Executive Rex. W. Tillerson a cash bonus
payment of about $3.36 million and 185,000 restricted shares for his work in
2007, according to a Tuesday filing with the Securities and Exchange Commission.
The company also increased Tillerson's salary to $1.87 million, effective
Jan. 1.
In 2006, the CEO received a compensation package valued by the oil giant at
about $18.4 million, which included $1.5 million in salary and a $2.8 million
bonus. At the beginning of 2007, Exxon Mobil boosted Tillerson's salary to $1.75
million.
According to the filing, Tillerson's $3.36 million cash award was part of a
$214 million bonus pool approved by the company's compensation committee on
Wednesday.
The bonus payments also included $2.15 million awarded to Senior Vice
President J. Stephen Simon, $1.86 million given to Senior VP Donald D. Humphreys
and $1.26 million awarded to Senior VP Stuart R. McGill.
In addition, Vice President Harold R. Cramer was awarded a bonus payment of
$1.59 million. Cramer's annual salary was also raised to $840,000, as of Dec. 1."""

http://www.advfn.com/nyse/StockNews.asp?stocknews=XOM&article=23609512...

COST SQUEEZED? I DON'T THINK SO,,,

"Wait a minute. What did you just say? You're predicting $4-a-gallon gas? That's interesting. I hadn't heard that." -- Feb. 28, 2008 --George W. Bush, Washington, D.C.

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Tinto (Moderator) says on Jun 30, 2008, 22:09:

I guess I'm reading gibberish in the annual reports of the petroleum related companies I've invested in. When they report a tripling of daily lease rates for drilling rigs, supply ships or the cost of a new tanker (IF they can find that type of equipment/ship in the spot market), it's make believe. Yeah, OK.

Cost squeeze does not mean no profits, it means less profits. Just like farmers are raking in the dough now, they'd be raking in a lot more if they weren't getting squeezed by sharply higher prices for fuel, fertilizer, natural gas, propane and land rent.

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miamimike says on Jun 30, 2008, 23:11:

Tell me, are small or midsized famers doling out millions in salaries, bonuses to themselves? Farmers and the Oil companies aren't even a close valid comparison,,,

Ya must be reading Gibberish Tinto! LOL

"Wait a minute. What did you just say? You're predicting $4-a-gallon gas? That's interesting. I hadn't heard that." -- Feb. 28, 2008 --George W. Bush, Washington, D.C.

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BillBigD says on Jul 1, 2008, 17:08:

Miamimike,
Do a quick little research on the new millionaries in North Dakota from the Bakken Shale that is barely producing any oil yet. Or look at the samething that is happening in the Haynesville Shale in LA/TX
Tinto- You are right there is a HUGE backlog on Deepsea Rigs, and yes there is a big difference in the Amount of oil in these fields compared to land fields.

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BillBigD says on Jul 1, 2008, 17:09:

Oh and by the way the Sushi-Den in Denver is really good.

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