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Fuel costs are on the rise – what’s the impact for your supply chain?


RisingFuelBlogImageAccording to an article by Jack Farchy in the Financial Times, oil prices have reached an eight-month high at $121 dollars per barrel and this trend does not seem to be about to change with current tensions in the Middle East.  Did you ever wonder how much of that translates into a direct supply chain cost impact?  Let’s take a closer look.

Freight providers are naturally the first to feel any fluctuations in fuels prices and they need to protect themselves through their pricing models.  To do this, many impose fuel surcharges or escalators which are adjusted on a regular basis (usually monthly) to pass on higher (or lower!) costs related to the purchase price of fuel.

Most major companies take the published price of fuel in the local country or region and then use it on a scale to apply a percentage escalator (or more commonly known as a surcharge) to the base freight charges.  The escalator is based on the percentage of fuel that will likely be used to provide the service.  For example, fuel represents a much higher percentage of total cost for air freight services than it does for trucking.  As a result the escalator for air freight services will be much higher than for trucking services.

However, fuel surcharges and service prices are not calculated in a universal manner.  For example, all major freight providers have their own fuel escalators.  An understanding of total service price requires knowledge of both the basic service price and the fuel escalator rules.   Each fuels surcharge system must be investigated carefully to understand the ultimate impact on the costs of freight.  

Let’s take a look at the escalator of UPS Express Critical Service, an air freight service.  As demonstrated below, UPS Express Critical Service’s escalator is based on U.S. Gulf Coast Kerosene-type jet fuel prices.

(USGC) kerosene-type jet fuel historical prices

FuelChart1 400

Source US Energy Information Administration

Clearly there has been a steady increase in these jet fuel prices – which have essentially doubled over the last year.   But what does this mean in terms of the fuel escalator on the basic price of freight?

The below graph illustrates that as the fuel prices increase, the percentage fuel surcharge that applies will increase on a defined scale.   Many providers will also provide bands for price stability within which fuel prices can fluctuate without driving a change to the escalator percentage.
UPS Surcharge Example

FuelChart2 400Source UPS 

So what things should we look for in the surcharge system?

  • What fuel and pricing mechanism is the surcharge based on?
  • How often are the prices reviewed? (monthly, quarterly)
  • Are they based on the costs of the previous month or an average of three months?
  • What is the method of application of the surcharge?
    • Are the bands small or large?
    • How does the surcharge system change at different price points for fuel?

The cost of fuel can have significant effects on your supply chain.  Understanding that impact is important as there are business levers that you can deploy to as the impact gets larger – network optimization, packaging redesign, postponement, changes to mode, etc.

Do you know what a further 20 percent increase in fuel costs would mean for your supply chain?


Improving IT & online marketing integration


After visiting several clients to discuss further optimization of their business I noticed that managing an e-store is not always as easy as expected. When analyzing e-store launches, we noticed that a lot of attention was given to topics like:

  • Web design, web functionality, (international) payments solutions, legislations and tax and customer support.
  • The (IT) project management for development until the close of the hypercare period was going smoothly.
  • Outlining roles and responsibilities for maintaining the e-Store.

However, when the monthly results of the online sales figures were reported, it was noticed that the goods sold were not in line with the forecast. But why does this happen? 

Process integration
As mentioned in one of my earlier blogs the interaction between sales, online marketing and IT is critical to become successful in the online world. It is essential that the processes between these functions are linked and where possible are integrated. Several international consultancy/analysts firms have been reporting on the importance of integration of e.g. online marketing in relationship with successful management of an online store. 

Most organizational structures do not encourage communications between departments, as the reporting lines are often not in line with the process structure. Therefore it is preferred to implement functional processes that enforce the communication between the different organizational teams. This could be done with a matrix organization or a temporary project structure with sufficient mandate to implement change. When those procedures, communication and reporting are clearly defined and managed it will help to achieve the objectives and provide the mechanism to steer and align activities.

Organizational implementation
If we examine existing e-store implementations we notice that a clear split has been made for the operational functions. What frequently is seen is the following organizational implementation:

  • e-Commerce shop management function is (part-time) performed by the client
  • IT Web store management is outsourced to an external party
  • Payment processing mostly outsourced to a specialized provide
  • Customer services is performed by the same or another external party
  • Fulfillment is performed by the same or another external party

What is being noticed is that even having a fabulous designed web store that is technically functioning superb it is no guarantee for success. If your website can not be found online by your potential customers the success will be limited. Therefore the importance of the eCommerce shop management function is vital for launching and maintaining a successful web store.

Requirements for sourcing models
To ensure that e-commerce shop management will contribute significantly, it is a valid option to have an experienced/specialized party involved to do the set-up of the shop management function. Based on their knowledge and use of supporting tools/techniques they can do the initial set-up and implementation of this function. When your own organization wants to and is capable of performing this function on its own, the sourcing contract needs to be flexible enough to provide you with the opportunity to do so without any impact to the other contracted eCommerce services.  

Suggested E-2-E communication model
To ensure that the integration of on and offline channels is secured it is desirable to have periodic alignment sessions. During these sessions a check is performed on brand strategy, strategic marketing planning and related items.

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The online marketing function is more and more an integrated part with the other (technical) functions needed to support an e-commerce solution.

When outsourcing an e-commerce solution, it is preferred to have the possibility included in the sourcing contract, to insource/re-source the online marketing function. You should have the flexibility to do this without jeopardizing the other services in the contract.

How is your online marketing function organized?



Examining the role of China in the supply chain


Departures 200pxOver the last few months, I have seen an increasing number of companies taking a hard look at the role China plays in their supply chains. For a variety of reasons, many companies have already begun moving certain manufacturing and supply chain activities out of China and back to the U.S. For example, last year Sleek Audio moved 100% of its operations from Guangdong, China to the U.S. citing concerns about quality and process control. American handbag manufacturer Coach also recently moved a significant portion of its operations out of China to escape rising labor costs. Unlike Sleek Audio, however, Coach moved these activities not to the U.S. but to India, Vietnam and the Philippines. Plenty of analysts are seeing this as a more likely trend. This article makes the case that while manufacturing may shift away from China, it will most likely move to lower-cost countries as opposed to the U.S. or the U.K.

When companies look at their supply chains and re-evaluate which activities they perform in China, there are five primary factors they must consider.

  • Labor costs in China are rising. Recently wages have risen by 15 to 20 percent per year. Whether they will continue to increase at this rate is questionable, but a continued increase is a near certainty.
  • The value of the Renminbi against the dollar is increasing. If this trend continues, as it has over the last 18 months, doing business in China will become increasingly expensive for American companies.
  • Performing supply chain activities closer to consumer markets can improve responsiveness to shifting customer preference. 
  • Protection of intellectual property is a top concern for many companies, particularly those in highly competitive markets. Companies must be able to establish processes and select partners that will ensure their IP is safe.
  • Many supply chain costs are difficult to predict or model. For example, predicting how often an unexpected rework or engineering change will occur can be difficult, even when historical data is available. Supply chain design decisions will have a significant impact on the cost of these kinds of events when they do occur. In some cases, these costs can be so significant that they offset any expected savings by moving activities from a higher cost location close to consumers to a lower cost location that is much more distant.

It is impossible to say with any degree of certainty what is likely to happen in the future, but there is plenty of evidence suggesting companies will be re-evaluating how China impacts supply chain performance. I think the companies that are able to evaluate their supply chains – building in flexibility – on an ongoing basis will be in the best position to make changes when it is appropriate to do so. 

Have you seen companies taking a closer look at the role of China in their supply chains? If so, what conclusions have you seen them reach? Please share your thoughts in the comments section.


New Forum to create "gold standard" for device renewal


The following post was written by Scott Crawley, President, Integrated Services for ModusLink.

DRF Logo

More than 1.6 billion wireless devices are produced every year. Less than 1% of these devices are recycled1. With smart phones being replaced or upgraded every 11.5 months, most discarded phones show little wear, still perform to the manufacturer’s standards and have considerable life expectancy left.  ModusLink has teamed with Sprint Nextel, eRecyclingCorps, Brightstar and CDMA Development Group to found the Device Renewal Forum (DRF) and breathe new life into used electronics.

The DRF is designed to expand the use of renewed devices by building awareness, ensuring product quality and certifying their proper operation.  By creating a technology-agnostic “gold standard” for testing and certifying renewed devices globally, we can extend the lifecycle of wireless devices and reduce the more than 65,000 tons of toxic waste created by billions of devices discarded each year. 

Earlier this week, I had the pleasure of announcing the creation of the DRF alongside the other founding members during a press conference at the Mobile World Congress in Barcelona.  We were able to get in front of the leading players in the wireless space at the industry’s biggest event of the year to discuss the benefits of a device renewal standard.  The benefits to the environment are clear.  Our objective is to also demonstrate that proper e-recycling and device renewal can have a financial ROI if we create a more secure environment where the economic return from secondary channels outweighs the operational challenges.  

This can be done by building confidence in the renewal process among potential customers, the carriers who will provide service for the devices and brand owners whose products are re-entering the market in an uncontrolled manner today.  That confidence will come from the creation and maintenance of a common device renewal standard with input from these and other stakeholders in the process.

The potential benefits of this type of standard include:

For consumers:
• A concrete set of performance expectations for a renewed device
• Assurance around robust data wipe processes
• Access to a higher level of technology at a lower cost
• A venue for receiving value for those consumers upgrading their device

For carriers:
• Confidence that renewed devices will operate effectively on their networks
• Creation of a new pool of potential customers

For OEM brands:
• Address key issues of intellectual property protection
• Shorten the replacement cycle for new devices by creating a stronger market for renewed devices

For device renewal partners:
• Create a certifiable standard that will be used in the industry for the protection of employees, consumers and the environment
• Ability to leverage economies of scale

The biggest potential winner in this process is the environment.  With more than 80 percent of all cell phone purchases in the U.S. to replace an existing phone2, Dave Edmondson, founder and CEO of eRecyclingCorps summed it up best, “Reuse is the highest order of recycling.”

We are delighted to be a part of the forum and have high ambitions for what it can achieve.  I’d like to invite other interested stakeholders to join us in developing the standard and eventually creating standards for other consumer electronics renewal beyond mobile phones.  Visit the DRF website to learn more.

Share your success stories about device renewal or other ideas for reducing e-waste below.

1. Source: CDG, GSMA and EPA
2. Source: Gartner


Irish Supply Chain Conference


supplychainconf20123  200On February 28th, I attended Supply Chain 2012, an annual Irish supply chain event.  A wide variety of industry leaders from companies like Microsoft, Logitech, Vodafone, Dell, and Diageo were in attendance, all speaking on a range of topics including the supply chain as a competitive advantage, consumer behaviours as a driver of supply chain development and implementing new supply chain strategies.

Some of the hot topics at the Conference were:

  • The need for supply chain leaders to be at the executive table in the boardroom.
  • The need to change the structure of supply chains for mature and growing markets.
  • How fuel costs and global instability are making companies take a second look at the structure of the supply chain, driving postponement.
  • How the supply chain and its visibility is key to protecting the brand.
  • Developing people in the organization to be supply chain professionals.
  • The importance of lean thinking in the supply chain to ensure agility and lowest total costs.
  • The importance of understanding all the costs in the supply chain to build business cases that make improvements or changes in the supply chain.

All in all it was a very enjoyable event that included some of the leading minds in the Irish supply chain industry.


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