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Don’t Waste Your Time Playing Truckload Fuel Surcharge Games

Don’t Waste Your Time Playing Truckload Fuel Surcharge Games

Fuel Game

Over the last few years, both gas and diesel fuel prices have been trending downwards. While lower prices at the pump probably bring welcome savings to your personal pocketbook, changing fuel prices impact the trucking industry in a different way, thanks to fuel surcharge programs.

Because fuel is a large part of the cost of truckload transportation, most carriers and shippers participate in a fuel program of some kind. When fuel prices fluctuate significantly, like the decrease we’re experiencing now, it might be tempting to modify your fuel surcharge program. However, the best strategy is to resist playing that game.

Why You Should Resist Changing Your Fuel Surcharge Program

The majority of fuel programs use a five, six, or seven-cent multiplier. Simply put, for every five, six, or seven cent change in fuel prices, the fuel surcharge goes up or down a penny. As we have discussed, an equitable fuel program involves more than understanding a carrier’s MPG and billable miles. You also need to understand how much dead head a carrier has and the difference between billable miles and actual miles.

Range of Fuel Programs

Let’s look at how big a swing there is between the most and least generous fuel programs. Say, for example, that your average rate per mile was $1.75 and you were paying $0.50 in fuel surcharge in March 2014. Your total cost would have been $1.75 line haul + $0.50 fuel surcharge = $2.25 total cost per mile. Now look where you end up using different multipliers.

Fuel Blog
There is only a 2.4% difference between the seven-cent multiplier and the five-cent multiplier. So it doesn’t matter if you were stingy or generous in the past with your multiplier; your reduction in total costs are similar. If you think that a different multiplier would better reflect your freight, I would encourage you to wait until you next scheduled procurement event to make that change.

You might also be tempted to change the index you are using to calculate fuel surcharges. This will not work either, as all fuel indices we looked at are highly correlated, and over longer periods of time, their movements are virtually the identical as we have discussed in our white paper, Truckload Fuel Surcharges: How They Work and What They Cost. This white paper also points out that shippers are likely to save more on transportation by employing other methods that develop stronger relationships with carriers and make freight more attractive to them than they are by playing the fuel surcharge game.

Consider, too, that a recent Logistics Management article reported that carriers’ overall cost of doing business are rising, despite the dip in diesel fuel costs; their savings are nearly entirely offset by the drop in fuel surcharges and other increasing expenses.

Final Thoughts

Playing games with surcharges will not result in long-term savings and can strain industry relationships. Thus, I recommend resisting the urge to change your surcharge programs in response to fluctuating fuel and diesel prices. I can’t tell you where fuel is going, but I can tell you that if you are using a standard fuel program, you are protected as much as possible from changes in fuel prices on truckload freight.

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Comments

DH

Why would your starting point be equal if you had different programs? In a 5cent world wouldn't my March 2014 FSC be less than $.50 to begin with?

1.27.15

Reply

Mark Montague

Really good post by Kevin. Falling fuel prices make it less important how you calculate the fuel surcharge. Linehaul rates have been holding up in the spot market until about the last week or two, so his point that other costs are going up, is also validated. Those costs include insurance, driver pay, equipment costs (driven partly by compliance mandates) as the big drivers and numerous small costs of operation that add up.

1.27.15

Reply

Kevin McCarthy

If you use the same base you would actually get a higher fuel surcharge with a five cent multiplier in March. However that implies using a lower line haul rate to make up the difference. In this example we used a lower base for the five cent multiplier so the line haul rates were the same. On the other hand we could have used the same base but decreased the line haul RPM by ten cents. To learn more about how fuel surcharges work I’d encourage you to read our white paper on the subject.

1.28.15

Reply

Ryan Hatcher

I’m confused by the premise of this post. You state that there is “only a 2.4% difference between the $0.07 and $0.05 multipliers” but in my experience, many shippers would love to spend 2.4% less on freight. This represents $24,000 per year for a client with $1,000,000 spend. Many of our clients spend significantly more than a million, so 2.4% is by no means insignificant. Multipliers should be reflective of the carriers’ miles per gallon, the vast majority of which are currently above 5.

Additionally, you state that fuel index selection is unimportant because they “are highly correlated”. While this is largely true as far as the fact that, barring some seasonal factors, indices will move up and down together, it is not true for the price of a gallon of fuel. As you know, it is the fuel price that dictates how many pennies a surcharge will rise or fall. Fuel indices should be reflective of the shippers’ value chain footprint. For example, as of today the national average diesel price is $2.01, while the Gulf Coast (PADD 3) average is $1.90. If a shipper’s footprint is primarily in the Gulf region, they should be pegged to $1.90 as opposed to $2.01. Using PADD 3 as opposed to the national average would be more reflective of the carrier’s actual fuel cost and would also provide $0.03 per mile savings to the shipper.

The fact that carriers’ costs are rising should be reflected in the base Linehaul rate, not by fleecing customers via generous fuel surcharge tables.

2.25.16

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