Get Ready for the Rising Cost of Fuel to Impact Supply Chain Spend

Spend Matters welcomes a guest post from John Haber at NPI, a spend management consultancy focused on delivering savings in the areas of IT, telecom, transportation and energy.

Late last year, I spoke to a reporter from the Associated Press about the rising costs of fuel. As the price of oil inches toward $100 a barrel, businesses fear the impact it will have on the recovery of the global economy.

Here at NPI, we believe $100 a barrel may be the tip of the iceberg. Some experts are estimating fuel costs to hit $120+ a barrel in the near future, which is a real possibility. So, what will happen to your supply chain spending?

Expect air surcharges to double within two months. Air rates are highly susceptible to fuel cost increases and fuel is a profit center for carriers. When the price of fuel/oil rises, carriers pass on any increases to shippers. It's important to note that most parcel carriers operate on a two-month lag against current fuel prices. While you won't feel an immediate impact following a fuel price increase, you can bet the bottom line you will feel it 60 days later.

The pinch on TL/LTL will be felt much sooner. Unlike small parcel shipping, truckload and less-than-truckload pricing is based on a weekly fuel rate. Within a week or two of a crude oil price hike, TL/LTL costs will go up. Expect more trucking companies to go out of business as a result, which will lessen price competition in the marketplace.

Supply chains will feel the impact from all sides. Simply put, you're going to pay more to produce and ship products, and it will be difficult for end-consumers to absorb them. Back in 2008, many consumer-facing companies instituted delivery surcharges to lessen the impact of high fuel costs on their profits. They included landscapers, food delivery, cabs and more. It was one more slap in the face to consumers who were experiencing the beginnings of a recession. While a fuel surcharge on landscaping may not be of grave concern to a procurement or supply chain professional, the overall impact that rising fuel prices will have on the economy will be significant as consumers react.

These are just a few examples of the immediate impact rising fuel costs will have on your supply chain. More important is the question that corporate procurement and supply chain executives should be asking themselves: What tactics do I deploy to negate and/or protect the company against these cost increases?

Please see next week's post from John Haber on ways companies can negate and protect supply chain spending from rising oil prices.

-- John Haber, EVP of Transportation, NPI

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