Tuesday, July 6, 2010

Fuel Surcharges make up 40% of your logistics management costs - know how they work

Fuel Surcharges make up 40% of your logistics costs – you need to know how they work

Around 10 years ago is when fuel surcharges became ubiquitous. Prior to that time, the cost of fuel was always there of course, but in those days shippers essentially paid for fuel as a part of their linehaul rates. The market changes in fuel costs were for the trucking companies to worry about. The impact of fuel was something left to maybe negotiate at year’s end, or perhaps as part of a contract renewal. The shipper’s perspective was that managing fuel costs were a trucking company’s problem to understand and account for. Since that time, the burden of dealing with market changes in fuel costs has shifted from the trucking companies to shippers.

With fuel surcharge making up 30-40% of a typical company’s logistics costs it important for managers in both operations and finance to know how fuel surcharges are calculated and how the diesel market affects their freight spend. These days shippers are directly exposed to the potentially budget crushing fluctuations in fuel costs and the curiously structured surcharge matrices. Theoretically the fuel surcharge tables that most carriers use are a direct representation of actual fuel costs to calculate the fuel surcharge but I have yet to be given an explanation that makes me feel comfortable that the matrices are more than just an extension of a carrier’s line haul costs. This is not to say that fuel costs are not a major cost factor for carriers, I just disagree that the tables represent the impact of fuel accurately for a carrier from an operating perspective. There is too great of a difference from carrier to carrier for it to be a true representation. This tells me there is a “fudge” factor built into the numbers allowing carriers to hide operating costs beyond just fuel in the fuel surcharge matrix.

An ecommerce company shipping from a order fulfillment operation? For small package shipping, companies are at the mercy of UPS and Fed Ex for not just air and ground services and pricing, but to both company’s own fuel surcharge tables. There is not a lot to understand about small package fuel surcharge other than to know you have to think of the cost as an extension of their pricing and pay attention as the fuel prices change – for better or worse.

For truckload and LTL shipping, you’ll see fuel surcharge matrices calculated as both a per mile and a percentage of line haul cost basis. In both cases – the fuel surcharge table will be based on the US Governments Diesel Fuel Index (posted on the DOE website). It is updated weekly and is also calculated on a regional and national basis. Depending on the footprint of your trucking company either type of fuel index could apply. The “per mile” basis is simply calculated by adding the per mile charge on top of your line haul rate, then multiplied by the number of miles shipped. The “percentage” type surcharge takes the cost of the shipment (for LTL, the discounted tariff rate and for TL, the linehaul portion) and adds the percentage of cost derived from the table on to that. Just like you audit line haul costs on freight invoices, it is also important to audit fuel surcharges.

Fuel matrices are generally built to adjust with every $.05 increase or decrease in the DOE diesel fuel index and are effective for any shipments tendered in a given week’s period of time.

Ken is a 15 year veteran of logistics and supply chain operations. He has founded companies in the ecommerce order fulfillment and transportation management system markets.

Startup Order Fulfillment and Social Media for Logistics