How should Shippers Manage Carrier Fuel Surcharges?

In the most recent Transportation Buying Trends Survey undertaken by Canadian Transportation & Logistics magazine, there is an interesting set of questions that pertain to fuel surcharges. Over 68% of shippers support the view that “fuel surcharges are necessary as long as fuel costs continue to be highly volatile.”  Slightly less than half of the survey respondents believe “carriers apply fuel surcharges correctly.”  Over 61% agreed with the statement that “fuel surcharges are a way for carriers to squeeze additional revenues from their customers to improve their profits.”  Over 55% of shippers support the view that “carriers should adjust their freight charges to market rates that include fuel surcharges and as a result simplify their billings.”

Perhaps the most interesting finding is that 25.8% of shippers have created their own fuel surcharge index.  Since I interact with both shippers and carriers in my daily work, I would like to weigh in on this topic.  This set of responses begs a few questions.  Should shippers be taking their precious time to create fuel surcharge indices and formulas?  How should shippers approach the topic of fuel surcharges?  What should shippers do to optimize their freight costs?  Here are my thoughts.

For shippers that use both private fleet and for-hire carriers, it is essential to be fully informed on all aspects of fuel costs and fuel surcharges.  Even for carriers that use exclusively third party carriers, there is a requirement to have some familiarity with the leading indices and the current surcharges being applied.  For Canadian and cross-border shippers, a subscription to the Freight Carriers Association of Canada’s weekly fuel calculation bulletin will provide you with one of the industry standards for LTL and truckload shipments.  For shippers that use intermodal service or are considering it in their freight programs, they should obtain a copy of the railway/IMC fuel surcharge formulas.  These differ (e.g. are lower) from the over the road surcharge numbers.

The next thing a shipper should do is to gain an understanding of the components of a freight rate.  One needs to understand that a carrier’s freight rate or tariff is based on several components.  There is the cost of pick-up and delivery, the line haul component, the cost for any special handling (e.g. residence, construction site deliveries, etc.) and of course, the fuel component.  For LTL and small parcel shipments, there are a number of other variables that come into play such as shipment weight, density, cube, packaging etc. 

Shippers need to understand that each carrier has its own mix of freight, its own fleet size and specifications (e.g. straight trucks, tandems, tridems etc.), its own head haul and back haul requirements in terms of both yield and volume and its own primary and secondary markets.  In other words, fuel costs and surcharges are a large piece of the puzzle but they represent one element of a carrier’s total cost structure.  At the end of the day, the carrier looks at each shipper’s freight and relates it to their costing model, business requirements, profit objectives and of course, market rates to determine their rate structure.

For shippers that “squeeze” carriers hard and insist that they will pay, for example, 80% of the current FCA proposed surcharge, they need to understand that their carriers will have to augment their base rates or accessorial charges to ensure they are achieving satisfactory yields on their freight.  It is somewhat analogous to a carrier doing research on the costs of corrugated paper and pallets.  Certainly they are important elements of the cost of the shipper’s freight but they represent only one piece of the pie.

In my view, shippers should make sure their freight programs are as efficient as possible.  They should focus on those areas where they have control.

• Packaging optimization
• Shipment size optimization
• Network optimization
• Mode optimization
• Consolidation/deconsolidation opportunities
• Carrier optimization

In the case of the latter, they should do a comprehensive annual bid to make sure they are paying market rates for freight transportation, accessorial charges and fuel surcharges.  To make their lives easier when it comes to analyzing the bids they receive, they should standardize on one fuel surcharge formula.  In addition, they should make their freight as “carrier friendly” as possible.

The other thing they should do is have a checklist in place to evaluate their carriers on efficiency. One of the key questions for me is not what a carrier is charging for fuel; It is how well are they performing in the area of fuel economy.  That will be the topic on next week’s blog.

The 2012 American Trucking Association (ATA) Leadership Meeting will take place in St. Petersburg, FL during the period May 20-23.  DDC FPO will be sponsoring Neil Newhouse, Partner & co-founder of Public Opinion Strategies.  Neil will address the 2012 ATA Leadership attendees at the ATA Advocacy & Government Affairs Luncheon on Monday, May 21.