Managing Fuel Costs: Tips for Shippers & Carriers
Melton Logistics – 02/01/2024
Rising fuel costs have long been a concern for transportation and logistics professionals. Since 2020 and the emergence of COVID, spikes in the cost of fuel have disrupted the global supply chain and moreover the economy replacing driver shortages as the industry’s primary concern. Let’s evaluate how rapid changes in fuel costs directly impact our valued customers, shippers, and carriers – we’ll also provide tips for minimizing the effects of elevated fuel costs on your supply chain.
The average retail price of diesel rose a stunning and record breaking 55% in just six months in the summer of 2022. While an increase of that magnitude is certainly not the norm, it created enough of a disruption to rewrite the transportation industry’s status quo and keep diesel prices hovering well above pre-pandemic levels, even today.
Other global issues such as civil unrest abroad, economic inflation, seasonal demands such as summer and holiday travel, the shifting price of crude oil, and a lingering ripple effect from the global pandemic all contribute to fuel cost’s erratic nature. With the sheer number of intertwined variables to consider, even experts have immense difficulty predicting fuel prices well in advance.
How Fuel Costs Impact Carriers
When fuel prices spike, the carriers are the first to feel the initial impact. Fuel is one of the carriers’ largest operational expenses and it directly impacts their ability to transport cargo throughout the world. Also consider that the vast majority of the truckload transportation market is comprised of fleets of less than twenty trucks; these small fleets don’t wield the purchasing power to drive down their fuel prices, so they are paying pump prices and paying as soon as they fill up. Covering the inflated cost of fuel without raising rates is generally untenable, especially as 2023 saw excess capacity across all market segments, which served to reduce freight costs from the robust levels of 2022. Increasing rates to maintain pace with fuel costs risks damaging or even losing business if those rates climb too high, too fast. Balancing profitability with market competitiveness isn’t a new challenge for any business, but since carriers almost always feel the impact of fuel increases before the rest of the supply chain, it’s their lead the industry follows when responding to sudden shifts in shipping rates.
How Fuel Costs Impact Shippers
Shipping rates will most always inflate together with elevated fuel costs. Shippers are then given a very difficult choice; failing to negotiate a good market rate with a carrier risks passing that added cost onto their paying customers and driving that business elsewhere given inflated contract pricing.
Conversely, walking away from a trusted carrier’s elevated rates just to hire a new, unfamiliar one with cheaper rates risks service failures via late deliveries, miscommunications, fraud, and other much costlier headaches, ultimately resulting in the same outcome – unhappy customers, mounting financial pressures and overall supply chain inefficiency. This is compounded greatly for shippers managing time-sensitive cargo, or even perishable goods that cannot sit in trailers for long periods of time. Without close working relationships with a reliable network of carrier contacts, shipping rates can easily skyrocket to exorbitant amounts.
How Shippers & Carriers Can Mitigate Excessive Fuel Prices
Rising fuel costs force shippers and carriers to collectively make one of three choices:
● Operate at a loss
● Pass the elevated cost onto paying customers
● Reconfigure your current shipping strategy
While rebuilding an entire new supply chain every time fuel prices erupt is a difficult and unrealistic option, most companies can utilize certain preparations and strategies ahead of time to mitigate the fuel cost’s financial impact on their business. Below are some of those strategies designed to aid both shippers and carriers:
Tips for Shippers
1. Negotiate Fuel Surcharge – A fuel surcharge specifies how any increase to fuel costs will be managed. The surcharge also clarifies how adjustments to fuel-related costs can be made, securing a more predictable pricing baseline even during the most volatile of times.
2. Choose the Optimal Mode of Transport – Ensure that you are selecting the most efficient mode of transportation for your products. Smaller shipments can be shipped via sprinter van, hotshot or other more economical means rather than overpaying for a full truck load.
3. Consolidate Shipments – Get more “bang” for your buck. Consolidating shipments reduces the number of trips required to deliver your goods, making your overall supply chain more efficient. This requires a level of expertise to coordinate shipments and optimize truck routes.
4. Invest in a TMS – A TMS (Transportation Management System) and route optimization software streamline supply chains by ensuring delivery schedules and/or routes are the most efficient by identifying unnecessary detours and assisting drivers avoid spending time and fuel sitting in heavy traffic.
Tips for Carriers
1. Update Vehicles and Equipment -As modern commercial trucks grow more MPG friendly (even more so with those classified as light duty vehicles), the long-term benefits of operating a newer vehicle provide a steady return on investment. Similarly, regular service including engine tune-ups, tire maintenance, and brake checks will keep your vehicle operating at or near peak efficiency. Tire pressure is worthy of special attention, as under inflated tires can decrease fuel efficiency. Always keep tires properly inflated and in good condition.
2. Practice Eco-Friendly Driving – Even little things like smooth acceleration and deceleration or intentionally cutting down on idling the engine dramatically impact fuel efficiency when multiplied over thousands of miles.
3. Consider the Benefits of Fuel Hedging – Just as shippers can establish fuel surcharges in their contracts, carriers can agree to contracts with financial institutions or fuel providers to effectively lock in fuel prices over a specified period. There are several types of hedging to include futures contracts (fixed fuel price at a future date), and options contracts (fee-based protection against surprise price hikes).
By identifying some of the most common methods shippers and carriers use to mitigate fuel prices, companies can quickly adopt those strategies that best fit their business and situation.
Now more than ever, companies need supply chain solutions designed to withstand all forms of major disruptions. Melton Logistics and our team of transportation experts can assist! How can we help provide a shipping solution that best fits your company while concurrently maximizing cost efficiency?