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Death, Taxes & Fuel Surcharges

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 {complink 577|Avnet Inc.} 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.

17 comments on “Death, Taxes & Fuel Surcharges

  1. AnalyzeThis
    July 22, 2011

    I agree, if you work in the electronics supply chain, it's absolutely impossible to completely avoid death, taxes, and fuel surcharges.

    Of course optimization is important and anything you can do to save on transportation costs is great, but no matter what you do, it is impossible not to feel the effects of fuel surcharges. Even if you don't directly take on the cost, you certainly end up paying indirectly.

    This is a very frustrating aspect of the supply chain to manage because fuel prices are beyond your direct control and are often difficult to predict. Occasionally, you hear stories of companies correctly hedging on fuel (most notably Southwest's smart hedge three or so years ago), but really, those type of strategies — even if they logistically feasible for your organization to attempt — are essentially gambles.

    Anyhow, again, there are things you can do to reduce costs, but if you're dealing with physical electronics, you will never avoid these expenses. And I sincerely doubt free teleportation technology will be developed within our lifetimes!

  2. Kunmi
    July 22, 2011

    Out of many certainities in life, I use to think death is the inevitable. In the western world in comparism with other countries and nations, taxes and fuel surcharges are certainties that cannot be avoided. They are unnecessary evil but you know what I want to agree with the fact that we could work with it and around it. In electronic supply chain, it could be a death sentence but I believe the consumers could work closely with their partners so as to make some profit and not loses in the long run. The companies logistic can also slash these expenses if everyone work together with awareness that it will affect every single one of them consciously or otherwise.  

  3. Eldredge
    July 22, 2011

    The procurement and shipping logistics for even a small business can get pretty complicated very fast. There also may be a trade-off to aggregated shipments in terms of additional required inventory and storage. At the same time, any efficiencies that can be gained are worth more now than they ever were.

    However, I suspect turning logistics into a profit center is a lot easier if my name is FedEx!

  4. Ms. Daisy
    July 23, 2011

    I bet even companies like Fedex that make money from logistics must be feeling th pinch by now. The prolonged gas prices definitely will inch into the bottomline.

    All the surcharges made at the expense of the populace is the problem to our economic recovery, not the size of the stimulus package. The oil companies are declaring record surpluses. How can that be in a moribond economy. that tells me the surcharges are artificially created to make profits that naturally should not exist.

  5. Anna Young
    July 23, 2011

    DennisQ,I agree with you. “it is impossible not to feel the effects of fuel surcharges, directly or indirectly

    Hence, I support Gerry Fay's statement that supply chain and logistic management must seek to work together to develop a more cost effective transportation and logistic process to best managed the inevitable fuel surcharge. As this will remain a significant part of logistics cost in years to come.

     

     

     

     

     

  6. Clairvoyant
    July 23, 2011

    I agree with this blog. Fuel costs are affecting pretty much everything, and it is hard not to see the price increases. Fuel costs are out of our control, yet we highly rely on fuel.

  7. mfbertozzi
    July 24, 2011

    In addition, for example, according to Europe's Energy Portaly, we can notice quite huge gap in fuel retail price, moving form country to country. We would say also fuel for example a barrel of gasoline in Venezuela costs about 4 US$. That's irrealistic gap in oil price is completely “turn” over supply chain market and, at the end, customers.

  8. Eldredge
    July 24, 2011

    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.

  9. JADEN
    July 25, 2011

    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.

  10. Daniel
    July 25, 2011

    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.

  11. Eldredge
    July 25, 2011

    Beginning to sound a lot like just another tax.

  12. Houngbo_Hospice
    July 25, 2011

    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. 

  13. mfbertozzi
    July 25, 2011

    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.

     

  14. Barbara Jorgensen
    July 26, 2011

    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.

  15. garyk
    July 26, 2011

    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.

  16. abd
    July 26, 2011

    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.

  17. electronics862
    July 27, 2011

    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. 

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