We sit at the height of the largest e-commerce boom in the last twenty years. The way we approach shipping both personally and professionally is changing. Before the brick and mortar stores can even start playing their Christmas music, e-commerce sites are advertising shipping schedules to “guarantee delivery” for free shipping for various holidays. So what does this have to do with buying electronics? A lot.
As the entire world moves more retail away from stores and into e-commerce business, the greater the strain on supply chain capacity becomes. While Amazon has begun to experiment in the final stage of their own home delivery service, the pressure on traditional shippers like FedEx and UPS continue to increase. The great majority of us have become accustomed to ordering something today and receiving it tomorrow. The fact that the supply chain can no longer support that doesn’t seem possible.
So how do we adjust our thought process without jeopardizing our business?
Peak shipping season gives all companies the same challenges regardless of the product. Your choices are either pay more or have your shipments take longer. Neither of those are acceptable options to pass on to our customers.
The Challenge Of Costs During Peak Season
1. Peak Season Charges:
Ocean freight has always run off of a peak season surcharge system. In 2017, however, UPS and FedEx announced that they were going to incorporate this policy as well. Customers were going to see up to $1.00/lb increases during the week following Thanksgiving and leading into Christmas. For smaller shippers, this could increase your shipping budget upwards of $20,000 for the fourth quarter alone.
2. Expedite Fees:
A lot of people are tempted to buy faster product time than they would originally need to avoid the peak season shipping. There are several challenges with this strategy.
- Often that expedited price was not included on your quote, so you have a margin assumption that you are going to miss.
- You will be carrying that cost in inventory.
- Depending on your chosen shipment method your shipment may have to wait for open air cargo. space, causing it to sit longer prior to leaving. If you don’t have guaranteed cargo space, or are paying for premium space with a delivery guarantee, you could see delays of 5-7 days waiting for shipments to move from China. That delivery delay negates any time you saved buying your product expedited.
3. Expedited Freight Fees:
Premium service levels out of Asia are the easiest ways to guarantee your shipments will leave Asia in the first available space. The challenge is because the amount of space is limited. These are the costs that increase the most. While an expedite service rate in peak season could be a $0.40-$0.50 per/lb premium, express services will be closer to $1.00/lb.
The cost driver increases from UPS and FedEx are a direct result of a system that is over capacity. Everyone was exposed to the challenges in 2014, where between the weather and capacity restrictions cause UPS to miss deliveries all over the country. As air shipments have increased 240% over the last decade, FedEx and UPS are racing to catch up. Unfortunately, this is not something that can be quickly fixed.
The Challenges of Capacity
1. Holding Inventory:
Many U.S. businesses no longer hold inventory in their own warehouse. Supply Chain management is sophisticated enough that they are shipping directly from their Asia supply chain for just-in-time delivery to their customers. When the Peak season hits and there are delays or cost increases, they can’t pass this on to their customers.
2. Not All Air Freight Goes On Cargo Planes:
Over half of all air shipments are on passenger lines. This means that even though UPS and FedEx can add support planes into certain routes (As UPS has in 2017 out of Hong Kong), 50% of the space is restricted to commercial airline routes. The amount of space available is fluid, as it depends on passenger cargo, which takes priority.
3. Significant Cost Impact:
There is a significant cost impact during the peak season to acquire additional air & truck cargo capacity, temp facilities, additional sorting, and delivery personnel. UPS in 2017 was anticipating bringing on 95,000 holiday employees to support their projected shipments. Due to labor shortages, the cost of temporary wages continues to be driven up to get the best people.
In order to improve the capacity, significant improvements need to be made to the current infrastructure. The continued increase in package movement has surpassed the simple “put more planes in the air/trucks on the ground”. This is timely and costly. Over the next 5 years UPS and FedEx have committed in increasing their infrastructure, improving their automation, and implementing more cross training to make employees more flexible.
- UPS spent $3 billion dollars to increase output and saw their profit shrink in 2016 as they processed over 712 million packages.
- UPS has already pledged $4 Billion dollars in automation and expanding capacity – 30% more than what was spent in 2016 to automate 3 domestic facilities.
- In 2016 UPS ordered 14 Boeing 747-8 cargo jets, at the cost of $5.3 billion to increase their infrastructure between Asia and Europe.
- Until the infrastructure improves, UPS and FedEx will continue to push out or eliminate their “guaranteed” delivery times during peak season.
So How Do You Avoid All This?
The only way to truly avoid these cost increases and time delays is to stop shipping during them. For many of us, that is not an option. The best that we can do is to plan our production and our shipping to be timely and economical. Many of the cost increases that are being put in place during the peak season are actually in place not to increase revenue, but to defer smaller shippers from taking capacity. UPS and FedEx, as well as all other freight forwarders will continue to allocate space to their largest shipping customers, making it difficult if you don’t have enough volume to support your needs.
At Epec, we have a 15 year partnership with UPS that puts us as one of the top regional accounts. This relationship and the volume of shipments that we are bringing in on a daily basis allow us to have guaranteed space on planes. Our shipments don’t have to wait, as we have pre-clearance through U.S. Customs, so there are no delays. Being able to leverage the volume of shipments we manage out of Asia daily not only guarantees our space on the planes but also allows us to keep our costs in line during the season so we don’t have to pass the additional cost on to our customers. One of the biggest mistakes that you can make during this time is to try and start a new relationship with a freight forwarder. You want to work with someone who has experience, volume, and can work with you to meet whatever goal you are trying to accomplish.
The holiday season both in U.S. and in Asia is the biggest challenge for supply chain professionals. Our team is completely focused on making sure that these are as stress free and business as usual as possible for our customers. Holiday planning starts in September and continues through the end of the Chinese New Year. We are here not only to support our customers from design and manufacturing, but also to get your product delivered quickly and economically.
*Editor's Note: FedEx will not be charging a flat rate peak season surcharge fee. FedEx posted seasonal surcharge will be as follows. The Holiday season surcharge will be effective Nov. 20, 2017, through Dec. 24, 2017. FedEx Express and FedEx Ground in the U.S. and Canada will increase the surcharge during this period for additional handling by $3 per package, for oversize goods by $25 per package, and for unauthorized (over maximum weight) shipments by $300 per package.