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Tuesday, March 18, 2008

Just-in-Time is Just Breaking Under $4 / Gallon Diesel - $110 / Barrel Oil

Diesel Fuel prices have been hitting over $4 per gallon across the United States this month and the average is almost there nation wide.  The last increases in Diesel prices have created a new trend in over land freight shipments.

Freight Shipments are stopping.


Thousands of loads are going unfilled now.  Trucking firms and independent operators alike can no longer afford to ship freight loads that pay less than $2 per mile.

The problem is that many companies have agreements and contracts that lock freight rates at a percentage of sales or at fixed amounts.  They do not have the flexibility to raise their freight rate offers because they do not have the flexibility to pass on higher prices to their own customers.

That means that freight is not moving.  Thousands of loads are starting to back up around the country at this point and many trucks are coming off the road or only taking the loads that will pay rates that keep their trucks filled up with diesel.

Contractual locks on prices by companies such as Wal-Mart, Lowes, the Home Depot, Office Depot, Kroger, Walgreens and many others have pushed freight firms and their suppliers into a corner where the goods can not ship profitably and that means they do not ship at all in some cases.

If fuel prices continue to rise, freight back ups are going to increase, suppliers will be forced to limit operations or renegotiate with their massive retail customers.  Retailers will be forced to pay higher prices and in turn they will be forced to eat that cost in their profits or pass the price increase on to consumers.

Wal-Mart used increasing prices in core consumer products as a marketing tool.  Wal-Mart kept prices from increasing by as much as 30% in an attempt to take customers away from competitors like target, essentially buying market share.  Wal-Mart's competitors can not afford to keep up with single handed attempts to limit inflation and Wal-Mart can not keep it up forever either.

People might forego buying Orovo from Walgreens for a few months, but what happens when milk, bottled water or god forbid a new flat screen TV doesn't show up on the shelves on time.