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.