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.