GCCA Prepares First-Ever Cold Chain Index
By Stephen Neel, Ph.D. Senior Technical Director, Global Cold Chain Alliance. This article was originally published in the January-February issue of COLD FACTS Magazine.
Historically, achieving annual rate changes from customers reflective of the shifting costs of operating refrigerated warehouses have been challenged as arbitrary, or countered with indices that do not reflect cold storage businesses. To equip members with resources to aid in those conversations and remove subjectivity, the Global Cold Chain Alliance commissioned the first-ever Cold Chain Index (CCI), which was designed to improve the economic information available to all industry participants. This idea was an initiative of the board of directors to help facilitate industry growth and mitigate concerns of commoditization.
Corey Rosenbusch, the President and CEO of GCCA, explains that the CCI tracks the growth rates of costs, using actual expense classes from the IARW Productivity and Benchmarking tool. Labor, electric power, supplies, repairs, and rent are the five expense categories included in the model and references official sources of economic data for changes in those expenses.
“The reason the board made this a strategic priority comes back to the concept of growing the industry,” he says.
“One of the challenges was the constant pressure from customers on pricing and rates as it applies to the services they provide. Being equipped with some tools that will allow us to better educate and inform customers about cost structures in our industry will allow members to be more productive in negotiating annual rate changes.”
To that end, the Cold Chain Index utilizes a customizable template that members can use to provide justification to their customers during discussions. This was something that wasn’t available before because of the uniqueness of the cold warehouse industry.
“A customer might reference CPI or PPI in contracts for rate changes and those indices don’t represent our cost structures,” Rosenbusch says.
“Labor and energy are our two biggest cost drivers and they aren’t necessarily accounted for in those indexes. We also have a tremendous amount of invested capital in our assets that is often not factored into customers’ calculations. We were able to build a model that more accurately reflects that cost structure and then apply commonly accepted indices to measure the growth or increases in those costs quarter over quarter.”
Vicky Salin, Ph.D., the researcher who put the index together, says the data came together through public economic information. That information was then tracked throughout the general economy attached to specific details of refrigerated warehouses and then monitored, compiled, and aggregated into this service that an end-user can utilize to understand costs and how to use the information for making pricing decisions.
She set the data from U.S. official sources, primarily the U.S. Bureau of Labor Statistics Employment Cost Index (ECI) with the “Transportation and Material Moving” occupations and the industry “Transportation and Warehousing” sections combined in equal weights to generate the cold chain labor cost indicator.
“We examined the regions and particular areas of the country that had differences compared to the national average and then we account for those differences in making a template for members so they can adjust for their particular situations,” Salin says.
“Costs of labor in the last decade have been very stagnant, though recently it has seen some differences and the segments of the labor force that matter to the refrigerated warehouse industry—trucking for instance—have been increasing. We felt it necessary to observe them and make this as specific as possible to our industry.”
The Index revealed that labor was the largest share of expenses on average, at 35 percent of the total, property rent or lease expenses representing nearly one-third and power accounting for 8.4 percent. The “other” category included the leases on material handling equipment, utilities other than electric power, and unspecified other expenses.
To account for energy, data was collected from the U.S. Energy Information Administration Electric Power Prices, by state. Rent data was collected from a combination of the Construction Cost Index for industrial property (Census Bureau) and the CBRE Global Industrial-Logistics Prime Rents report. For supplies, repair and other, the Producer Price Index for core goods final demand (excluding food and energy) was used. There are limits with any attempts to standardize, especially related to geography and labor issues in different regions. The plan is for GCCA to publish a baseline index for the nation and for different regions. The quarterly adjustments to the baseline index data fields will be updated annually and easily integrated into the users’ file so that the custom dashboard the user has created will be updated. The model can also be extended to international markets as well once adequate benchmarking data is acquired and similar indices in those countries to measure change.
The index will get stronger over time. The more data entered year over year or quarter over quarter will offer a more robust data set to reveal trends. And, it’s flexible enough so the warehouse can enter its own cost shares related to its operations and capture the data for a custom analysis. The association adheres to an antitrust policy that requires each member to make its own pricing decisions and prohibits members from making such decisions collectively. The index contains historical, aggregate data representing annual percentage changes in costs and can be considered by members in establish their prices based on their geographical and other factors.
While there’s still some work to do on the CCI, the plan is for GCCA to release the first index in February 2019, when a full year’s worth of data will be ready. Although the index will initially be available in the United States, the goal of GCCA is to expand it glob ally and provide these tools for Canadian, Mexican, Australian, and other international warehouses in the future.