A 'hot topic' that is being widely reported and discussed within the supply chain is the ever-increasing cost to serve, which includes all cost factors associated with the production and delivery of a product and the service provided to customers.

Currently, we're seeing suppliers and manufacturers ring-fencing their cost to serve by splitting it out from their product costs and highlight these costs to customers. This increased transparency is being used as a way to justify the product prices rises that were seeing across many product categories.

Here we look at what’s driving the increase in the cost to serve:

HGV drivers:

The shortage of HGV drivers has led to manufacturers, distributors and wholesalers competing to not only recruit, but also to retain drivers. Driver salaries have increased by over 30% and businesses are offering drivers bonuses and monetary incentives to stay.

There is also mixed messages as to whether the shortage of drivers is being solved; it has been reported that there was a 25.6% increase in HGV driver tests conducted in 2021 vs. 2019, and a threefold increase in applications for vocational provisional licenses. However, smaller operators are struggling to compete with the salaries being offered by larger organisations, which is hindering their ability to recruit. Despite the positive signs from the industry, 92.7% of UK logistics businesses still report HGV driver recruitment problems of which 40.2% say this issue is severe.

Salaries:

In addition to drivers' salaries, there is an increase in salaries across all roles, as well as the increase in National Living Wage. The additional NI contributions compounds these additional staffing costs further.

Energy:

The cost of energy has been widely covered in the industry news and national press with energy wholesalers going out of business due to gas price hikes of over 450% and power prices up over 250% in the last 12 months.

Energy consumed by manufacturers includes not only production-related costs, but also includes costs associated with distribution, including lighting, chillers, freezers, gas for heating and so on.

Vehicles:

The ironic thing here is that during lockdown, a number of companies handed back their vehicles to the lease companies in order to save money and maintain jobs because they were surplus to requirements.

Then, as we came out of lockdown, the increase in demand meant all those companies needed their vehicles back.

However, the vehicles that had been returned had already been snapped up by larger companies as they were struggling with the HGV driver shortage so opted to take on more small vehicles that didn’t require a specialist license.

So by the time the smaller businesses wanted their vehicles back, there were none left. This then put pressure on them being able to service their own customers, so businesses had to turn to agency drivers and hire vehicles, thus increasing their costs even further. This has been compounded by a shortage of electronic componentry and parts resulting in a delay in obtaining new vehicles.

Final word:

These well-known factors are adding to the supply chains cost and the costs to serve customers, as well as impacting the level of customer service.

We are currently seeing suppliers and manufacturers communicating price increases of between 2% and 5%, with the majority putting new pricing in place from January 2022.