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.
“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.”
Barbara, that's certainly true… but also, as you say, this was completely expected and to some extent completely understandable. Do I like paying more in freight costs? Absolutely not. Do I understand why I'm paying more in this environment? Yes.
And as you say, there is very little anybody can do this about this. And really, while changes like these certainly have an impact in the electronics supply chain, I'd be more concerned now if I were say, Amazon: I can't begin to imagine the additional costs they'll experience due to this rate change, much of with they won't be able to really directly pass on to the consumer.
As for your question about if we'll ever reach the point where shipping costs will negate the benefits of outsourcing… well, that's certainly remotely possible, but I think the real thing that could significantly reduce electronics supply outsourcing would really be a combination of various problems: if shipping costs increased, and labor costs overseas increased, and build quality was compromised, and there were security issues, and/or the political climate changed… of course I believe it's possible that it may become no longer beneficial to outsource so much to Southeast Asia.
And of course then we'd likely just shift the outsourcing to another, closer region, but still.
I think the real issue is that not all nodes of the electronics equipment supply chain are absorbing the cost equitably.
Many partners push back on their suppliers when asked to pay a fuel surcharge, but readily pass it on to their customers.
While there are strategies one can employ for lowering the impact of the rise in fuel costs, one thing we can all do is ensure we are absorbing our fair share and not expecting our partners to absorb it on their behalf.
This is the only way to foster collaborative efforts in freight consolidation and other fuel saving strategies.
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Freight cost is always a metric for comodity managers and buyers, and it's always used based on urgency, I wonder if increasing the rates is a good idea instead of lowering the prices and win some of the shipments made by ocean.
Regards
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It's great to see that UPS and Fedex are doing well. We definitely don't need more companies hurting with their bottom lines. And while rate increases were expected due to fuel surcharges, it appears from the outside that these companies are padding their profits just like the oil companies. Were left to assume the rate increases were implemented to maintain the profits from the previous year, as opposed to growing profits with extra fuel charges. Otherwise UPS and Fedex will be hated like the oil companies who say they need to raise prices, yet every year have record profits. Remember record profits, not sales.
With freight rates rising due to the fuel surcharge, many companies are going to have to look at how much it is going to cost them to ship materials overseas to build, then to ship back to the states to sell. Either the prices go up and consumers feel the pain, or they move production back stateside.
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It seems unlikely freight costs will go high enough to discourage outsourcing on their own merits, but mixed with other cost factors such as risiing labor costs in other regions in combination….perhaps.
@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.
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.
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.
Eldredge,
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.
Regards
Ashish.
Barbara ,
I had written about this earlier as well.
IF Crude Oil does cross above $150/Barrel then watch what happens to Freight rates.
Day by Day by Day-Mexico becomes a much more attractive outsource destination for most Chinese manufacturers.
Regards
Ashish.
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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.
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?
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”.
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.
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.