Most of us are familiar with the typical fuel surcharge formula - a percentage of the basic freight charge is added to the freight bill. The question is: “Is there any logic to that formula?” And the answer is often NO!
Fuel surcharges were imposed following an increase in the cost of fuel paid by carriers. Prior to the implementation of fuel surcharges, carriers included their overhead (which consists of fuel, maintenance, labor, insurance, and other factors) into the rates they charged. In other words, the full cost of fuel was built into their rates. Once the actual cost of fuel rose beyond the point where they could absorb it, carriers felt they were entitled to help in the form of a surcharge.
To some, adding a percentage to the freight amount makes sense. The higher the freight, the more weight or distance the carrier must account for. But this theory does not take into account the actual expenses that a carrier incurs as a result of increased fuel cost. The typical tractor/trailer combo gets about five miles per gallon of diesel. If it travels 1000 miles it will consume about 200 gallons. If fuel costs only $1.60 per gallon, the total expense is $320. But if the price of diesel is closer to today’s $2.90 per gallon that cost rises to $580, an increase of $260.
Here’s an example of how the percentage approach results in too high a fuel surcharge. We received a rate quote of $142.73/cwt. from a major regional LTL carrier to ship 1,100 pounds 1,000 miles. With a 50% discount the base freight cost was $785.02, to which they added a 20.8 % fuel surcharge of $163.28. Considering that our 1,100 pounds was about 5% of the trailer’s capacity, our portion of the additional fuel cost of $260 should have been about $13.00. Instead we were billed 20 times that amount! Imagine the additional profit realized when this carrier billed the other shippers with freight on that trailer, using the same 20.8%. Is there room here for some negotiated reductions?
Fuel surcharges added to Full Truckload shipments are handled in a similar fashion by carriers, though some have changed their formulas to a per mile basis. The difference between our example of $2.90 and $1.60 per gallon is $1.30, or 26 cents per mile. Several carriers are currently offering 28 to 30 cents per mile. That’s better but it’s still too high, and definitely something to be negotiated.
The U.S. Energy Information Administration publishes a report every Monday afternoon that lists current retail diesel and gasoline prices in various regions of the country plus national averages. The website to visit is: http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_a_epd2d_pte_cpgal_w.htm. This is the source that most carriers and shippers use to update their fuel surcharges. Depending upon where your carrier picks up your freight, you may save money by insisting that they use the fuel prices in that region rather than a National Average. For example, if your freight originates on the Gulf Coast, you could save 5 or 10 cents per gallon compared to the National Average. California and New England, however, are typically higher.
Using these tips and guidelines, your negotiations with your carriers could save a considerable amount of money for your company. More and more carriers are open to these discussions because they know that as shippers become more informed, the current processes for calculating fuel surcharges are not defensible.
Ronald D. Grossman, PMC, PCMH, CISCM, CEPP, is the Principal of Argee Logistics LLC, a consulting and training company specializing in Transportation, Logistics, Warehousing, and Supply Chain Technology. He is also secretary and webmaster of ISM’s Logistics & Transportation Group and can be reached at rong@argeelogistics.com or (203) 641-7713. Membership in the Group is open to all ISM members who are responsible for or have an interest in the Logistics & Transportation fields.
Fuel surcharges were imposed following an increase in the cost of fuel paid by carriers. Prior to the implementation of fuel surcharges, carriers included their overhead (which consists of fuel, maintenance, labor, insurance, and other factors) into the rates they charged. In other words, the full cost of fuel was built into their rates. Once the actual cost of fuel rose beyond the point where they could absorb it, carriers felt they were entitled to help in the form of a surcharge.
To some, adding a percentage to the freight amount makes sense. The higher the freight, the more weight or distance the carrier must account for. But this theory does not take into account the actual expenses that a carrier incurs as a result of increased fuel cost. The typical tractor/trailer combo gets about five miles per gallon of diesel. If it travels 1000 miles it will consume about 200 gallons. If fuel costs only $1.60 per gallon, the total expense is $320. But if the price of diesel is closer to today’s $2.90 per gallon that cost rises to $580, an increase of $260.
Here’s an example of how the percentage approach results in too high a fuel surcharge. We received a rate quote of $142.73/cwt. from a major regional LTL carrier to ship 1,100 pounds 1,000 miles. With a 50% discount the base freight cost was $785.02, to which they added a 20.8 % fuel surcharge of $163.28. Considering that our 1,100 pounds was about 5% of the trailer’s capacity, our portion of the additional fuel cost of $260 should have been about $13.00. Instead we were billed 20 times that amount! Imagine the additional profit realized when this carrier billed the other shippers with freight on that trailer, using the same 20.8%. Is there room here for some negotiated reductions?
Fuel surcharges added to Full Truckload shipments are handled in a similar fashion by carriers, though some have changed their formulas to a per mile basis. The difference between our example of $2.90 and $1.60 per gallon is $1.30, or 26 cents per mile. Several carriers are currently offering 28 to 30 cents per mile. That’s better but it’s still too high, and definitely something to be negotiated.
The U.S. Energy Information Administration publishes a report every Monday afternoon that lists current retail diesel and gasoline prices in various regions of the country plus national averages. The website to visit is: http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_a_epd2d_pte_cpgal_w.htm. This is the source that most carriers and shippers use to update their fuel surcharges. Depending upon where your carrier picks up your freight, you may save money by insisting that they use the fuel prices in that region rather than a National Average. For example, if your freight originates on the Gulf Coast, you could save 5 or 10 cents per gallon compared to the National Average. California and New England, however, are typically higher.
Using these tips and guidelines, your negotiations with your carriers could save a considerable amount of money for your company. More and more carriers are open to these discussions because they know that as shippers become more informed, the current processes for calculating fuel surcharges are not defensible.
Ronald D. Grossman, PMC, PCMH, CISCM, CEPP, is the Principal of Argee Logistics LLC, a consulting and training company specializing in Transportation, Logistics, Warehousing, and Supply Chain Technology. He is also secretary and webmaster of ISM’s Logistics & Transportation Group and can be reached at rong@argeelogistics.com or (203) 641-7713. Membership in the Group is open to all ISM members who are responsible for or have an interest in the Logistics & Transportation fields.
