Supply Chain Management

How Higher Freight Impacts Procurement Challenges

Many supply chain elements take a toll on procurement professionals, and the increase in freight charges accounts for a myriad of woes. Here’s a look at a few of those woes, including the impact of higher costs, timing as it applies to what’s happened to Just-in-Time delivery and the ongoing delivery delays, how freight challenges hurt relationships, and how long labor shortages will continue in this segment.

It’s Always the Bottom Line

Freight rate fluctuations are responsible for a wealth of challenges all the way down the chain.

  • Raw material and component costs essential to electronics rise
  • Production costs inflate
  • Manufacturers adjusted prices or took a hit on profitability

The Electronics Industry Association (EIA) reports that the average price of shipping electronics increased by 20%, dramatically impacting profit margins for many. The banter was that shipping rates would fall this year. McKinsey predicts that supply chain disruptions and their hit on cost increases will happen every 3.7 years.

The globalization that migrated electronics manufacturing to Southeast Asia was based on low logistics and shipping costs. For the past two decades, however, and especially recently due to the pandemic, logistics costs have risen, and volatility in component costs is driven by shortages. Unprecedented demand combined with labor, parts, and raw materials shortage is reflected in shipping costs for electronic components and higher inflation for producer and consumer goods.

The Importance of Timing

Remember when Just-in-Time (JIT) manufacturing arrived on the scene? No longer would we be laden with burgeoning inventory. We’d get what we needed when we needed it. Now, however, JIT is susceptible to freight rate changes, shipping delays that impact production schedules, and even increased inventory holding costs to mitigate both. Procurement must be acutely aware of shipping rates to begin to harness their JIT systems.

And then, we began seeing port congestion and a shortage of shipping containers. The average waiting time for vessels soared by 24%, and there was a shortage of more than two million containers. Electronics was hit hard by climbing storage costs (up approximately 12%), production backlogs, and painfully longer delivery schedules.

Is there any relief? Some. But it involves more local sourcing and manufacturing. According to the National Association of Manufacturers, locally sourced products have a shipping time of just three days vs. ten days for globally sourced products. Faster delivery, happier customers.

Supply Chain Relationships

Rising costs from all sectors strain supplier relationships. While it is prudent to diversify supplier sources when there’s chaos throughout the supply chain, it’s a move that further exacerbates existing relationships—especially those where communication was already lacking.

All the fluctuations inherent in supply chains today strain those relationships. For procurement pros, there’s the reality of dealing with contract terms negotiated when the industry was more predictable. To avoid constant renegotiations in the future, contracts should be contingency-based, when possible, to account for potential volatilities and greater risk. These contingencies should include rate adjustments based on costs and multi-sourcing. It’s important to consider total costs when spelling out these adjustments.

As local sourcing efforts grow, landed costs may be higher based on availability and scale, but stability should improve. For the electronics sector, global sourcing has long been the norm. A move from freight-based deliveries to local and regional access, while painful to navigate, may substantially improve the long-term bottom line.

Labor Shortages

Freight challenges are not limited to those we’ve covered so far. Ongoing labor shortages have also plagued freight in terms of transportation and port workers. While unions have successfully negotiated contracts on the West Coast, East Coast, and Gulf, unions are now in the throes of contract negotiations.

Headlines show that more long-haul truck drivers are leaving the industry. From a driver shortfall of 80,000 drivers in 2021, the numbers are expected to grow to 160,000 by 2030. Dockworkers are also in shorter supply—a real challenge when freight arrives, and there are insufficient workers to unload it. Shipping also has labor shortage problems—the number of ship officers and sailors is decreasing, with no relief in sight. According to a recent maritime executive article, the shortfall has reached a 17-year high, and the shortage of officers nearly doubled in the past year. The fix will involve higher wages and increased benefits designed to impact employee retention.

And costs go up again…