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Swallowing cost hikes is unsustainable

James Thornton  —  Updated

The below content first appeared in the TEG Transport Insights newsletter. Transport professionals can subscribe to the newsletter here.

James Thornton

The TEG Transport Insights Newsletter

Continually swallowing cost hikes is unsustainable

The transport industry must change tack

Good morning, and welcome to another TEG Transport Insights newsletter.

 

It is natural for prices to increase over time. To promote a healthy economy, the UK government currently targets an annual inflation rate of 2%; it actively wants the price of goods to increase a little year-on-year. That means almost always, at any point, the price labels of everything are creeping up.

 

In response, employees request raises, and wages increase, and greater wages propel further price increases, and the cycle continues.

 

An industry off balance

In the transport industry, as things stand, the cycle is off balance. According to recent Parcelhero research, 84.7% of transport firms plan to absorb, rather than pass on, rising employment costs. Employees are costing firms more (whether due to wage increases or increases in national insurance contributions), yet transport companies are, for the most part, unable or unwilling to charge customers more.

 

The reasons why costs are being absorbed rather than passed on are numerous. Contracts play a part: many transport contracts are signed and sealed months in advance, preventing transport companies from raising prices. 

 

Another factor at play is competitiveness. The transport industry remains highly competitive. Typically, increases in transport prices force customers to reconsider suppliers, which makes suppliers reluctant to raise prices.

 

Tight margins, little wiggle room

Can transport companies continue to swallow cost hikes? It seems unlikely. Alongside being a highly competitive industry, our sector is characterised by tight margins. Tight margins leave little wiggle room for absorbing rising costs. Perhaps small increases can be absorbed temporarily. Over the long term, however, continually accepting dwindling margins can lead to disaster.

 

One potential industry ace is that of efficiency. If transport companies are unable to increase prices but face rising wage bills, they must look to reduce costs elsewhere. Greater efficiencies – such as those afforded by the TEG platform’s ability to maximise industry-wide capacity – can help.

 

Tech has the potential to solve a worrying industry problem. Adoption is a barrier we must overcome.

Further reading

Most transport firms plan to absorb rising costs

84.7% are unwilling or unable to pass costs on.

How smart 3PLs are responding to uncertainty

Pivoting between capacity sources grants operational agility.

How to optimise carrier capacity using the TEG platform

3PLs must control costs. Greater efficiencies can help.

TEG’s end-to-end logistics tech platform helps 3PLs deliver their customers’ most ambitious supply chain goals.