Five Market Concerns Driving Shipper Cost Increases
It has never been more expensive or frustrating to be a shipper. Rates are up, capacity is down, and, while Wall Street analysts are bullish on the transportation sector, many businesses are still struggling. It’s a disparity that contributes to billions of dollars of shipper overspending each year.
The following market concerns will have the biggest impact on shippers’ spending in the coming months:
1. Collusion. Accusations of pricing collusion are nothing new to ocean freight and small parcel carriers. But, for the first time, UPS and FedEx are facing serious legal action. These accusations are part of a larger lawsuit against the carriers’ decision to prevent customers from using third-party negotiation services. If UPS and FedEx win this lawsuit, many companies will have no recourse when carriers unjustifiably raise rates in lockstep with one another.
2. Capacity. Capacity is down and continues to drop. There is a dangerous lack of transparency around this issue, however. Carriers continue to under-utilize their infrastructure to manipulate supply/demand ratios— and, thus, pricing. Carriers will quietly increase capacity to handle higher volumes for the Chinese New Year, for example, then cut capacity to ensure maximum profit levels.
3. Staffing. The shipping industry now faces a serious staffing shortage, to be made worse by the implementation of the federal government’s Comprehensive Safety Analysis (CSA) program. Under this program, as much as eight percent of the current workforce may be unemployable due to safety records, increasing cost pressures on carriers.
4. Terrorism. Last year, Yemen Al-Qaeda operatives attempted to ship bombs to two Chicago synagogues, exposing the vulnerabilities within cargo inspection. As a result, many authorities are tightening inspection and manifest requirements. For example, a new Advanced Manifest rule for European Union (EU) customs requires an Entry Summary Declaration to be submitted at least 24 hours before cargo arrives in the EU. To cover the costs of enforcing this rule, many carriers are implementing Cargo Data Declaration Fees per bill of lading for all cargo bound for the EU.
5. Price per barrel. As the price of oil rises, carriers will pass the increase on to shippers. Air surcharges stand to double within months and some truckload and less-than-truckload carriers may go out of business, driving more price competition out of the market.
These factors all combine to create higher costs for shippers. Among small parcel carriers, several rate increases are of serious concern. Delivery area surcharges, for example, are up six to 10 percent over last year, while ground address corrections increased 10 percent.
Ocean carrier rates are up 30 to 40 percent over 2010. To top it off, the way that ocean contracts are negotiated has changed tremendously. In the past, ocean rates were negotiated in April and the rates were applicable throughout the entire year (excluding peak season).
Today, pricing is done almost on a spot quote basis, introducing a threatening variable into transportation spending. To conserve fuel, many carriers will continue to slow speeds, which will cause longer arrival times, less capacity in and out of U.S. ports, and higher shipper costs as expediting increases.
Rate increases across shipping modes have turned the complacent hum of shipper protest into a roar. The positive news is that there seems to be real opportunity for change in the way carriers price and contract with shippers. Understanding the rate increases that most impact their spending— and whether or not they are appropriately justified— may help shippers sing a different tune in 2012.