Risk Management

Five Ways to Reduce and Manage Fuel Surcharges

Companies can't entirely escape the realities of fuel surcharges carriers assess for freight shipments, but there are plenty of effective mitigatio...
Shawn CasemoreJanuary 30, 2012

Few businesses have the opportunity to apply a fluctuating surcharge to cover fluctuations in cost and protect profit margins. That has, however, become the norm for the transportation industry, from motor carriers to air carriers to couriers.

At present fuel prices have stabilized, but with the reduction in U.S. refining capacity and the pending embargos on some Middle Eastern imports, there is likely to be further escalation before prices cool off in the late spring. With this in mind, implementing strategies to combat rising fuel costs will help you maintain control over the total cost of goods.

Here are five strategies to mitigate rising fuel prices and develop control and predictability over transportation costs:

Create common ground. You wouldn’t likely write a blank check for services to support your business, but with a fluctuating fuel surcharge you are in essence doing just that. U.S. carriers generally don’t tie their surcharges to any centrally governed or regulated indices; rather, they use their own formulae for calculating the surcharges, which therefore can range from 5% to more than 60%. But you should insist on the use of a central index, like that provided by the U.S. Energy Information Administration, to ensure that rates are governed by an external party, are measurable, and can easily be tracked and monitored by both the carrier and your organization. The administration provides weekly updates on diesel fuel prices in a format that can be tied to fuel-surcharge premiums.

Leverage spending. Leveraging freight with fewer carriers offers another means by which spending power can be harnessed in order to negotiate competitive fuel-surcharge rates. Whether utilizing the services of a carrier or a third-party logistics firm (3PL), leveraging is an important tool to create competitive surcharges that are stabilized over agreed-upon time periods. We find many clients consciously applying leveraging with commodity suppliers, but few are applying this same strategy with freight carriers, forwarders, brokers, and 3PLs.

Try a different focus that brings the same results. If fuel surcharges appear to be nonnegotiable, avoid fixation and seek other means of reducing the total cost of transportation. For example, when negotiating finance rates with a bank, I am often told the banker is unable to remove certain administrative costs, which often seem petty, but is able to reduce the interest rate, essentially achieving the same overall investment. You will find many carriers can reduce tariff rates but are unable to change the fuel surcharge, as a central division within their organization may govern it. As long as the delivered price is competitive and reasonable, the results are the same.

Plan your next move. Freight carriers have made less-than-truckload moves quite appealing and convenient, with door-to-door service, flexible daily pickups, delivery, and booking, but there is good reason for that. Consider that the cost to move a full truckload of goods from Tennessee to Minnesota would be roughly the same price as moving three quarters of a truckload of goods using a less-than-truckload carrier. Planning transportation moves to utilize available space and optimize transportation mode is the most effective means of controlling cost. Unfortunately, due to customer-delivery commitments and poor planning, these opportunities are often not capitalized upon.

Mind your mode. My father often reminds me that most things are cyclical; just look at bell-bottoms and natural-gas prices. This appears to also be the case for various modes of freight transportation. Modes such as rail, once deemed uncompetitive and inconvenient compared with trucking, are now returning. Intermodal transport continues to gain in popularity for moves of full containers longer than 1,000 miles, and the price of shipping ocean containers is falling as a result of increasing capacity. Freight moves should be analyzed at least annually to ensure the current mode is still the most cost-effective solution.

Many organizations have rushed to outsource logistics, as it is not considered a core competency, but in doing so they have also lost an opportunity to control costs and develop a competitive advantage. Applying these strategies independently or as part of a combined freight cost management strategy will provide stability, reduce risk, and free up working capital for more critical investment.

Shawn Casemore is president of Casemore & Co., a consulting firm specializing in supply-chain management.