According to a 2007 survey of U.S. food and beverage companies, rising costs associated with transportation and energy are the number-one threat to their profitability. In fact, four out of five food and beverage firms reported they had experienced logistics/transportation and energy cost increases over the past year, and nearly half of those said costs had increased more than 5 percent — and that was in late 2006 before gas passed the $3 a gallon mark.

Spending on energy “has gone from an often-ignored line item to a large, unpredictable cost with significant impact on an organization’s bottom line,” notes the National Association of Manufacturers. But in today’s ultra-competitive environment, manufacturers can’t always pass those costs on to brand owners, and brand owners can’t always pass them on to consumers, forcing both parties to identify new ways to cut expenses. What can they do?

First and foremost, says consultant Jim Seber, president and chief executive officer of Seber Logistics Consulting, Skillman, N.J., brand owners should re-examine their reasons for using a particular contract manufacturer in the first place, especially if that co-packer is located some distance from their distribution center.

“It’s all about lowest landed cost,” adds the owner of one of the country’s biggest brand names. “If [rising] fuel costs make miles less affordable, co-packers that may have been competitive in the past may become less so than those closer to the customer.”

One Company’s Solution

When the price for shipping a truckload of product from a contract manufacturer in Colorado to its distribution center in the Chicago area went from $600 to $850 over a period of several years, natural snack supplier Michael Seasons, Addison, Ill., decided it was time to find a co-packer closer to home. Although the move cut shipping costs to just $400 a truckload initially, after just two years, the price has risen almost 40 percent to $550.

Since the company has little control over fuel costs, says Michael Season, whose business recently merged with Berkeley, Calif.-based Mexi-Snax to form Natural Snacks LLC, the company’s focus has shifted to maximizing each truckload. To accomplish that goal, the company is in the process of downsizing its product half an ounce, which will allow it to fit the same number of bags into a slightly smaller box. That, in turn, will permit an extra layer on each pallet, so each truckload can carry 1,350 vs. the current 1,200 cases. “We’ll still be paying $550 a load,” says Season, “but we’ll need fewer loads,” which, he hopes, will save enough money to prevent a third retail price increase in as many years.

If it’s to be successful, adds Seber, the company will have to work closely with both its customers and its contract manufacturers to accurately forecast demand and inventory requirements so it can avoid emergency shipments for out-of-stocks. “Good planning is absolutely critical,” he says.

But even well-planned production runs don’t always produce full truckloads. As a result, says Ron Osborne, director of operations at Carlsbad, Calif.-based Premier Nutrition, “We’re asking some of our contract manufacturers to hold products and combine them with the next run.” In the past, he explains, “We just loaded up and shipped out [whatever was there], and they held very little inventory. Now we want full truckloads. We don’t ship partial truckloads anymore unless it’s absolutely necessary.” He acknowledges that, in addition to taking up valuable space, holding inventory also has a financial impact on contract manufacturers since they don’t get paid until they ship the product. So far, however, they’ve been willing to do whatever they can to help.

What if they simply can’t hold product until there’s enough for a full truckload? In those cases, brand owners may want to look for ways to reduce the number of miles that a partially full truck must travel. For example, Premier Nutrition recently inked a contract distribution deal with a warehouse provider close to one of its short-on-space co-packers that will allow the company to ship directly from there rather than from its own warehouse, which is much farther away.

That strategy makes even better sense when a company works with a number of contract manufacturers in a particular geographic area, adds Peter Cokinos, senior vice president of sales and marketing at Elk Grove Village, Ill.-based Little Lady Foods. “Everyone in the area ships to a local distribution center where a single truck can be loaded with products from ten different suppliers before taking off for its final destination,” he explains, adding that such an approach has worked well for Wal-Mart Stores Inc. and The Kroger Co.

Other Modes of Transportation

Another way manufacturers and brand owners can reduce transportation costs is by considering different ways to move product. For example, says Seber, “If you plan ahead and if time is on your side, you may be able to use rail, which is cheaper than trucking.” Yes, it’ll take longer and products are likely to get rougher handling, but a couple of short hauls over the road combined with a long haul on the back of train can save you a couple hundred bucks a load, depending on your final destination.

But if rail isn’t an option, consider trying to find a better deal on trucking. For example, Michael Seasons recently negotiated a contract with a new carrier that shaves $25 off its current cost per truckload, and the company has agreed to hold that price for a year. At three to five truckloads a week, 52 weeks a year, that’s a savings of at least $5,200 – just for trying someone new.

Another way to save a few bucks is to skip the middleman and contract directly with independent carriers likely to charge a lot less. “We work primarily through a bigger company that contracts with independents,” explains Osborne. “But as our volume increases, we may need to look inside our organization and determine at what point it would make sense for us to work directly with some of those independents and take on some of those responsibilities ourselves.”

Taking control of the transportation component would also give brand owners the ability to optimize transportation spending. For example, says Seber, trucks could be scheduled to drop off ingredients and pick up finished product at the same time, so no gas is wasted driving an empty truck. The company also can work more closely with its contract manufacturers to improve on-time compliance. “Trucks sitting at the dock, engines running, while they wait to be unloaded is the kind of thing that drives transportation costs up,” he says.

“Times like this … really test the fabric of a partnership,” concludes Peter Hoeper, manager of contract packaging for Eden Prairie, Minn.-based Hormel Foods Corp. “But communication and mutual understanding can do much to strengthen the relationship for the long run.”