Mitigating the impact of Mideast tensions on retailers

By John Haber, jhaber@npifinancial.com

For the past two months, consumers have paid higher gas prices as a result of the political unrest in the Mideast. But, consumers aren’t the only ones feeling a pinch. Retailers are feeling it too as many suppliers, manufacturers and distributors implement “emergency fuel surcharges” as reported by The Wall Street Journal in late March of this year.

In short, today’s retailers should prepare for the worst. The impact of Mideast tensions will continue to drive shipping costs upward and, without an end in sight, this could have a serious impact on profits.

Over the next quarter, retailers can expect astronomically high fuel surcharges, with an increase of as much as 50% in the next 60 days. For those relying on ocean, truckload (TL) and less-than-truckload (LTL) shipments, the impact will be felt immediately. For those that rely on small parcel, there will be a 30- to 60-day lag between the announcement of surcharge increases and when they show up on invoices.

By June, many suppliers and retailers will start to raise the price of goods/services to compensate for higher supply chain costs. This has the potential to create a ripple effect that will drive down consumer confidence, which is already taking a beating from higher prices at the gas pump. With this scenario in mind, effective transportation spend management is critical to the performance of retailers as they enter the second half of 2011.

Here are several tips for retailers to mitigate the impact of Mideast tensions on shipping costs:

Make sure you’re paying a fair price to begin with. Most retailers grossly overpay for fuel in their carrier contracts -- and no retailer can afford to do that given current pricing volatility. Now is the time to understand exactly how much you’re paying and benchmark that pricing to determine whether it is fair.

Consolidate shipments. In the rush to meet consumer demands, many retailers sacrifice cost efficiency. To reduce costs, see how you can consolidate shipments as well as explore more cost-friendly modes. You may find the impact on the end-consumer to be minimal while realizing significant savings.

Think carefully before you expedite. Are you one of the thousands of retailers that ship a package via next day air, when it can get there via next day ground at half the cost? Closely inspect the services you’re using to determine if expediting is really needed.

Renegotiate when capacity increases (which it will). Shipping volumes will decrease as the rising cost of fuel decreases consumer confidence, creating excess carrier capacity. When this happens, be prepared to renegotiate your carrier contracts. Pricing for these contracts were quoted when shipping volumes were high and capacity was constrained, thus giving carriers extra leverage at the negotiating table.

There is no way to predict with certainty what will happen as tensions in the Mideast grow. But, with the right knowledge and commitment to effectively managing shipping costs, today’s retailers can minimize the financial impact.

John Haber is executive VP of transportation services for NPI (npifinancial.com), a supply chain spend management advisory firm that works with major retail operations across the globe. He can be reached at jhaber@npifinancial.com.

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