For nearly 40 years, the world has been very conscious of the cost of energy due to the volatility of fuel prices. The last 3-4 years have been especially volatile, with the peak price reaching more than $145 per barrel in July 2008, and dropping to less than $40 later that same year.
One of the major outcomes of rapidly rising oil prices occurred when truckers were forced to park their rigs in protest because they could no longer afford to keep running when fuel prices took another leap. Following months of protest in 2000, the Fuel Surcharge (FSC), was developed to recognize that at any time the price of fuel rose above an agreed base, there would be an additional fee paid that would enable the transport provider to remain whole in terms of payment for the additional fuel cost per mile. In a perfect world, this would have solved the problem. However, the variables involved in determining a realistic starting point are complex.
Some FSC calculations were established with a base price for diesel fuel ranging from $1.00 to $1.25/gallon. Once the base price is agreed, there has to be a reasonable measure of fuel efficiency to determine the base cost per mile. For example, if a truck averaged 5.5 miles per US Gallon, then the base cost per mile was 22.73 cents, and was considered to be part of the rate already paid for transport. If the price rose to $1.35, then the revised cost per mile would be 24.55 cents, and by the FSC calculation, the transport provider would be entitled to an additional 1.82 cents per mile.
If all things were equal, this calculation would be applicable to all providers. Geography plays an important role in determining the cost of fuel purchased, and the resulting FSC. Some carriers have elected to follow a formula that determines FSC based on a percentage of the base freight shipping costs rather than a cost per mile. There are variables for Less-Than-Truckload, (LTL), as opposed to Full-Truckload, (FTL) and consider how complicated these calculations can be when factoring in cross-border shipping between Canada, the US and Mexico.
We all face tough decisions at the time we establish budgets for a new business year, and determining the cost impact of fuel can be a source of great concern. Whether it is about operating a own fleet or using a contract carrier, there are common elements:
Does your fleet/carrier operate trucks that are reasonable fuel efficient?
Does your fleet/carrier ensure proper maintenance of equipment in order to achieve fuel efficiency?
Are drivers trained to operate utilizing progressive shifting, reduce unnecessary idling time, and follow safe driving guidelines in order to control fuel costs?
Even simple practices, such changing filters regularly, can increase fuel efficiency by 5% or more. On a unit that averages 100,000 miles per year, the additional fuel cost can be more than $3,800.
A major factor is whether your commodities have been rated correctly for the FSC. Not all freight is treated equally, and an error can prove very costly. Make sure that your ratings are current and appropriate for the cargo being carried, and the payoff can be significant.
If your transportation strategy is not an encompassing, integrated approach that is regularly reviewed to reflect emerging trends, avoidable costs will creep into your operating costs, and drive down profits. When was the last time your firm did a comprehensive review of these issues?