Surcharges or overcharges?

Update 2: Air Canada is feeling defensive about surcharges. The thing that doesn't ring true to me is that because the airline is hedging fuel prices (and their hedge price is now higher than market price) they want to maintain a higher fuel surcharge. So, I guess when their hedge price is lower than the market, they won't increase the surcharge and cite the rising market price as justification. Right

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This week's Economist has a report on the falling price of oil. Oil has declined from a high of just over $75 in the summer to just over $55 this week. Call it a 25% decline in 6 months. This might be a good time to have a hard look at any fuel surcharges built into your supplier contracts. You'll find suppliers of parcel and overnight express, travel providers, 3PL (third party logistics) often have contractual rights to add fuel surcharges to your negotiated prices. Less obvious will be suppliers of other goods that add fuel surcharges to their freight/delivery charges, depending on how those are negotiated. Having had a look in recent weeks at some corporate invoices, those surcharges don't seem to be declining as quickly as they rose.

Cheers,

David Rotor



Update 1: It seems that Michael O'Leary, CEO of Ireland's Ryanair agrees with me. Quoted today saying. "There is a fuel surcharge scam going on all over Europe. These aren't discretionary, you can't avoid them. They all said they would review them as oil prices fall. We said it would be a cold day in hell by the time they'd be reducing these fuel surcharges. We've been proven correct."

Shipping Costs - not quite a Marginal Revolution

Tyler Cowen over at Marginal Revolution, posted a suggestion to read this article at the New York Times. The author, Meline Toumani, makes the point that sea containers, the "giant metal boxes" have had a dramatic impact on the viability of trading goods internationally. One point I disagree with is her quote - The process is so efficient that transport costs have become "little more than a footnote in a company’s cost analysis" from author Mark Levinson's book “The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger”. She goes on to attribute Macy's decision to source clothes in Malaysia rather than down the block largely to a reduction in shipping costs. Having done strategic sourcing work for Macy's and its sister firms in the Federated Department Stores family, I can't quite agree. Labour rate arbitrage has, to my mind, more to do with the cost advantage Malaysia has over the garment district.

Let's take a look at Levinson's comment. PricewaterhouseCoopers,(1) published "Cutting your distribution cost" in 2004. Here's a chart from the report, that shows that distribution costs remain substantially more than a footnote:

The data, which seems pretty representative from the companies I've looked at, shows that transportations costs ranged from 0.27% to 12.57% with a median of 2.15% expressed as a percentage of revenue. I can tell you that Macy's isn't at the low end of the range, and few companies would consider even 27 basis points of their revenue as a footnote.

In another client situation, a hospital organization in the US North East. They spent about $750M annually, with just under $4M of that going for freight and logistics. When we took a look at the $4M in spend, they had over 2,000 suppliers providing transportation services. Savings in this one category were on the order of $500K. While, perhaps, not the most important spend category for every firm, I'd take a hard look at them when you're trying to reduce your costs for goods and services.

Cheers,

David Rotor

(1) - Under "full disclosure", I previously worked for PricewaterhouseCoopers, as a Vice President of Global Sourcing.