These days the supply chain is often in the news, with worries about shortages and increasing prices being reported. In our last “Freight Freak” blog, John B. said… “We felt we were finally starting to see a slight softening in the transportation sector early 2022. Then the Ukraine crises and sanctions began, thus more oil and energy fears and shortages, which re-kindled the already record high cost increases once again.”
A month has passed, and it’s time to check in with John again about recent news reports.
The online magazine Supply & Demand Chain Executive, pointed toward three challenges impacting retail, those being, “A nationwide shortage of truck drivers, a lack of available warehouse space, and rising consumer demand…”
On the other hand, an article in Freight Waves stated: “Concern is growing that the spread of COVID cases and city lockdowns in China will have massive downstream effects for global supply chains that could dwarf previous disruptions since the start of the pandemic.”
Thank you for the interview, John. Once again we would like to know how the supply chain looks from inside the fulfillment industry. Do you see the above-mentioned issues, and how are you and your clients dealing with the current climate as you see it?
The Pandemic & Ukraine, of course have driven significant increases and a strain on shipping demand. This has in turn resulted in parcel-shipping prices rising at the fastest pace in nearly a decade. It has also shifted “pricing power” to carriers. The “duopoly”, FedEx Corp. and UPS, both raised rates higher than the typical annual General Rate Increase (GRI). Rates have gone up from 4.9% to 5.9% this year, with the accessorials and surcharges going up anywhere from 4-40%. Anyone importing is suffering at least 4X’s the cost for a container from Asia compared to 2019- early 2020. It has actually caused the pace of supply-chain localization to rise significantly. In fact, a recent survey of 3,000 firms, found that companies in a variety of industries — including, consumables, some textiles, semiconductors, autos, and medical equipment — had shifted, or planned to relocate at least part of their supply chains. Companies in about half of all global sectors in North America intend to reshore or nearshore. Many have taken advantage of the section 321 provision between US, Canada and Mexico.
Temporary Peak Surcharges are expected to last through at least the summer and then of course the Holiday Peak Surcharges Kick in. So expect those extras to last through calendar year 2022.
Typically, transportation has not exceeded 8-10% of the cost of goods shipped, but many companies are well exceeding that expense level. I have seen some companies with transportation costs that are in excess of 25% of the cost of goods. Most shippers will have little choice but to start passing these costs on to the consumers. My prediction is you will begin to see either more Shipping and Handling fees in the eCom shopping carts, or alternatively, continued increase in the unit sale prices this year.
To add more insult, this past year the cost of storing goods and warehousing is as an additional pain point for merchants. These inflated costs are mainly due to the increase of labor and real estate cost; both also went up in the record levels. Prices to lease commercial spaces have jumped more than 25% with labor up by 25-33%. These third-party operators have no choice but to pass on the increases to the merchants. Shipping executives are bracing for more increases and continued bottlenecks, as we continue to experience unprecedented shipping demand and additional lack of resources as we get closer to the summer months.
So, What can be done to offset some of the transportation charges?
Just In Case (JIC). Have enough surplus inventory in case of an order burst, longer than normal replenish lead time or even a planned sale.
JIC may also be a new norm, planning for disruptions and preparing a structure that gives one option other than waiting for shipments that may not come for weeks or months. It is a more complex and dynamic model, but one that can provide huge economic benefits. At a minimum, JIC lowers the overall risk of the business and allows one to sleep better at night. And, as risk decreases, the value of the business increases. In other words, do what you can to protect against shortages and delays due to unexpected product availability. Of course, on the surface increasing inventory and increasing supplier relations is totally counter intuitive. But let me explain; when you weigh out the costs for shortages, lost sales, transportation, and labor for incoming receipts, you may find you come out way ahead.
Three thoughts to keep in mind… Be Felxible, Have Options and do whatever can be done to Reduce Risk.
** ** **
About the Freight Freak: John Bevacqua is the VP of Logistics at AMS Fulfillment. His area of excellence is in creating distribution and fulfillment operations that function as a capable interface between suppliers, retailers, and wholesale distributors. His experience includes developing and leading FedEx/ Kinko’s Distribution Services into the FedEx post acquisition, USA Wireless Technologies, and a top Logistics Management company. He has also worked with third party fulfillment companies, preparing him for his current position with AMS Fulfillment.