Benjamin Franklin said that the only certainties in life were death and taxes. I think if he were alive today and working in the electronics supply chain, he might add fuel surcharges to the list.
Based on anecdotal evidence, it is estimated that fuel surcharges account for 15 percent to 30 percent of an average company's total logistics costs. And according to the 2011 State of Logistics Report from the Council of Supply Chain Management Professionals, the cost of US business logistics rose 10.4 percent in 2010 to $1.2 trillion. To put that number in perspective, logistics now accounts for 8.3 percent of US gross domestic product (GDP) -- that's 3.6 percent more than the US Department of Defense's share of the GDP in fiscal 2010.
Despite the surging fuel surcharge expense, many members of the supply chain do not fully comprehend just how substantial these fees are, nor do they consider that they don't have to sit passively by while their logistics expenses skyrocket.
It is important for supply chain and logistics professionals to understand how fuel surcharges are derived so they can ensure they are not being overcharged. Most carriers base the fuel surcharge rate upon either the current US National Average Diesel Fuel Index or the US Gulf Coast Jet Fuel Price Index from the Department of Energy's Energy Information Administration. This data is combined with the carrier's own method for computing freight costs based on factors such as air vs. ground vs. rail and truck load vs. less-than truckload.
The big question is: Who is paying for this? If you are a carrier, you might say that it is the customer's responsibility. Customers may expect their carriers or logistics service providers to bear the added cost burden. The problem is, no matter who pays initially, at the end of the day we all pay. It is naïve to think that added cost in one link of the chain won't somehow affect all the other links. That is why it is so crucial for all parties to work together to develop more cost-effective transportation and logistics processes and strategies to offset the inevitable fuel surcharge.
Among the strategies we at Avnet Inc. (NYSE: AVT) recommend to our customers: order aggregation; considering more cost-effective transportation alternatives whenever possible; coordinating shipping schedules; and optimizing route selection. These are all methods that can help reduce transportation cost without sacrificing productivity.
The key to making any of these methods work, however, lies with a commitment to increasing visibility and collaboration with your partners. Your supply chain and logistics partners must have a clear picture of your true demand so they can plan accordingly. Much of the waste in today's supply chain results from poor planning or a lack of trust that your partner will perform as promised.
So, find partners you can trust, and make sure you are working with each other, not against each other, because as bad as things seem now, it could get a lot worse. With the average price of crude oil seesawing between $90 and $100 per barrel, supply chain professionals can expect surcharges to remain a significant component of their logistics costs for the foreseeable future.
This is a real opportunity to turn logistics from a cost center to a profit center, creating competitive advantage and adding value to your company.
Thanks Fay for the detailed information provided. Finding trustable partners is a crucial factor, It's really important to educate the customers to do cost effective business so that they can be profitable and can get more goods at the same amount what they are spending now.
I can't access the "State Of Logistics Report" that is referenced ($395 for non-members), but would appreciate related data validating the 8.3% of GDP statistic. I'm an electrical engineer who periodically orders parts for prototyping. I just completed online shipping estimates from two major logistics providers for shipments valued at $200 and $10,000. The fuel surcharge % adder ranged from 9.5% to 14.5% depending on shipment method (Ground vs. 2nd Day Air). The total shipment cost for the $10,000 shipment (50#, 20x20x20 box -- thinking electronic components from Avnet for a production logistics issue) including fuel surcharge with no discount for any sort of volume commitment or account with the carrier is 1.2%. I'm interesting to understand how to get from 1.2% to 8.3% or if I am misunderstanding?? Thanks.
QUESTION: When items are purchased from the internet, why NO sales TAX?
The person in what ever Country or State should pay the correct Sales TAX for that Country or State. How the US Govenment let this happen is unbelievable.
Gerry--thanks for breaking down how this works. I think knowing where these charges originate helps customers make informed decisions if and when they decide to push back. Sometimes it doesn't matter--costs are costs--but understanding the breakdown can at least foster intelligent discussion about how to maange them.
It is a correct and fair analysis Hospice_Houngbo, coming back to main focus on the articile I believe (imo) we are still quite far about worldwide recognize rules for shipment and as consequence supply chain is impacted by impredictable way on prices.
Venezuella's oil reserve is the second largest in the world and the country is a significant crude oil supplier to the world market. It is no surprise that fuel is more cheaper in the country. But when selling or buying oil in the international market there are some price regulations that every country should abide by.
Gerry you are right. Eventhough there are many uncertainties in our day to day life. Death, taxes, age etc are some of the certainties in life. Fuel surcharges are now a day’s common in aviation and cargo industries. Since there is a fluxuation in fuel price, most of the cargo companies are charging the fuel surcharges while creating the order. The best part is, this fuel surcharges have only half duplex link with the crude oil pricing. I meant, if crude oil prices increase, then they hike the fuel surcharges frequently, but the reversal is not happening in similar way.
Definitely fuel surcharge is going to affect everything and the effect will tell on every individual, as its affect transportation, raw materials, labour and energy. You can imagine what the manufacturer would do to increase the price of their products as a result of this.
I believe the fuel surcharges discussed in the article are levied by the shipping companies, not the oil industry, although they are intended to help cover the fuel cost. Since fuel surcharges are based on a calculation rather than actual fuel expenses, it isn't clear whether or not all of the surcharge actually is paid to oil companiies in the end - I think the likelihood is no.
In North America, the electronics supply chain relies heavily on ground shipping. Avnet's Gerry Fay interviews Dave Kevern, vice president, World-Wide Services at Federal Express to get insights.
Start slowly and carefully to prepare for the conflicts materials deadline, but start now. Start by empowering yourself with information about the issues.
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.
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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