Airline passengers were the first to feel the effects of increased oil prices as surcharges were quickly added to ticket fares in March. Now, the other shoe is (quietly) dropping: UPS last week announced it would increase its North America shipping rates by 6.9 percent, and FedEx's US shipping rates were raised by 3.9 percent as of January 1. Similar moves by other freight companies can't be far behind.
We all knew this was going to happen -- analysts and market watchers have been predicting this since the beginning of the year. There hasn't been a lot of hue and cry about these higher rates because I suspect businesses and consumers have other things on their minds at the moment, such as the EU's debt crisis and the US government's impasse over its own spending habits. But freight hikes cannot be ignored. Rate increases are pesky things: Once they are enacted, they almost never, ever are reversed. In fact, fuel surcharges added by airlines in 2008 have never gone away -- we just got used to paying those baggage fees.
Here's the other notable thing about these rate hikes (with kudos to Supply Chain Digital for pointing this out): Freight companies aren't hurting at the moment. For its fiscal 2011 ended May 31, FedEx's sales were up 13 percent to $39.3 billion, and net income increased 23 percent to $1.45 billion. UPS, which will release its most recent results tomorrow, is forecasting that its EPS for 2011 will increase between 17 percent and 24 percent over last year. This is great news for these companies and their shareholders, and management is clearly doing its job. And the rate hikes are no surprise -- everybody is feeling the pain of higher oil prices. But it's bad news for the supply chain.
Just do the math: How much electronics freight is shipped in and around the Americas? Gerry Fay's timely blog, Death, Taxes & Fuel Surcharges, gives us an idea. Now up the cost of that by 7 percent starting next week. At some point, a hue and cry will be raised, most likely by consumers. But there is very little anybody can do about it. You can't blame your suppliers if they are charging more because their costs have gone up. You don't want your customers blaming you. And so it goes.
The outsourcing model adopted by the electronics industry has saved companies vast amounts of cash over the years. It's an unfortunate truth that this model is highly dependent on logistics and the shipment of products around the world. I'm not sure if we will ever reach the point where shipping costs will negate the benefits of outsourcing -- or will we?
Freight rates differ from region to region, so it's difficult to tell the relative freight costs in China versus the US. But I know electronics companies can track that information, so I'd like to hear from readers. In the meantime, don't be surprised if your next domestic order of components costs more than it did last time.
Better packaging will definitely reduces the price and by using automated software for scheduling the product deliveries in one time will even reduce the shipping price. Best alternative is to come up with renewable resouces will reduce the transportation cost.
But when will the manufacturers also share some of this surcharge burden? Yes, better packaging and creative delivery logistics will help, I am just tired of the consumers bearing the brunt of every change in oil price and the manufacturers keep all the profits.
But there is very little anybody can do about it. You can't blame your suppliers if they are charging more because their costs have gone up.
Barbara,
I totally agree with you that blaming suppliers is not an option because costs have gone up. I feel rising costs would force the people to come up with some unique solution like "optimal packaging techniques".
Increase in price of crude oil is certainly of concern. I do feel the pinch when i have to fly home. Now, on top of the Europe has decided to collect carbon tax (about 5 Dollars per passenger). Do you guyz see supply chain getting affected if government start to collect taxes for carbon footprint also?
Freight rate is definitely going to increase as long as the crude oil price is not going down. It will affect all areas of supply chains. If a door is not close, a place like Mexico as you have said will not be able to enjoy maximum attention for manufacturers in China. I hope the crude oil issue will be globally addressed because it takes a major role in the world economy.
The points you mention here.Especially the impact that rising Labour costs will make it more prohibitively to produce something in one area and then ship it long distance to markets make perfect sense.
It has today become more Cost effective to manufacture things in Mexico and then drive it across the border in the US.
Too bad most people won't realise this until its too late to make the switch.
We need more honest and trasnparent rules and regulations all across the board to make things happen.
I agree with what Taimoorz said. Ultimately the price difference will be passed on to the end consumers. But then I would like to add that even some/good portion of hike in outsourcing cost also will come from end consumer's pocket.
I do agree that freight costs will not rise to the extent that outsourcing becomes expensive. However, the impact of increase in freight costs will be significant and the impact will ultimately relay to the final consumers in the form of higher prices. Perhaps increase in the number of shippers will increase competition and bring the prices down. Currently the logistics market seems to be dominated by a few key players.
@DennisQ – Amazon as well as a majority of these carriers’ customers, which are mostly contracted customers, should not be affected by the general rate hikes…only non-contracted customers.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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