Fuel costs may have been eclipsed by driver pay and benefits as the top cost item for trucking fleets, but that doesn’t mean they are not top of mind for savvy fleets. One year ago, the average price for a gallon of diesel was $2.47. Last week, it was $2.88, according to the Energy Information Agency (EIA).
In addition to the rising cost of fuel, more states are increasing their state fuel taxes to help pay for road and bridge repairs. California just boosted its rate by 20 cents per gallon. Clearly, fuel costs remain a concern.
While the cost of fuel is high, the real problem for fleets is they are always chasing fuel costs. What does that mean? The problem with fleets charging for fuel costs, even in longer-term contracts, is that it remains a guessing game. Take the recent California example. If a fleet and shipper was negotiating a contract back in February for hauling services from September to December of this year, that 20 cent fuel tax hike might not have been included if the fleet wasn’t aware a tax hike was coming. Did it have the insight necessary to see this back in February? And even more disconcerting, even if the fleet was aware of the 20-cent hike and built that into the contract, fuel prices in California actually rose 36 cents per gallon last week.
Who saw that coming?
The industry’s solution for years has been the fuel surcharge. But again, the fuel surcharge could be described as a historical charge. Fuel surcharges are typically based on the Department of Energy’s EIA average, or some other agreed upon price structure. These are all historical in nature, though, meaning that the carrier needs to recoup money already spent on fuel after the fact, and shippers could be paying more for fuel on their load’s movement.
“Once seen as an unavoidable ‘cost of doing business,’ advancements in technology continue to create opportunities for shippers and carriers to manage fuel surcharges based actual market costs – not outdated national and regional averages,” writes Breakthrough Fuel in a new blog post.
Breakthrough Fuel suggests a new method to managing fuel costs, particularly when it comes to the RFP process. According to the fuel management firm, the DOE Index is based on the national retail average, whereas many fleets buy their fuel in bulk based on wholesale prices. Additionally, the DOE Index does not easily adjust for regional variations or external influences, such as weather and refinery production issues, as was evidenced during the hurricane season.
“When carriers have to guess on future fuel costs in an RFP using the traditional system, sometimes they win and sometimes they lose,” the blog post notes.
Breakthrough Fuel recommends a market-based approach, which provides several benefits over a DOE Index program. First, it provides real-time transparency into fuel prices and those costs specific to each movement. It also calculates fuel costs from stations used along the route and takes into account outside influences such as weather.
The firm says that carriers using the market-based approach are able to more accurately create freight lane bids, giving themselves more visibility into fuel costs and more accurate and dependable revenue.
“This freedom from risk also creates more certainty for shippers, who know that the proposals they receive will focus on network capability and the ability to meet service requirements, not fuel price estimations,” Breakthrough Fuel writes. “Carriers can then be chosen based on their ability to meet performance metrics at a reasonable cost. In established relationships, carriers and shippers will be free to focus on continuous improvement across the network, such as converting long length of haul routes to intermodal.”
Breakthrough Fuel’s Fuel Recovery program removes the effects of geography, time, and tax variations that distort costs, it explains. The company will manage the process of carrier education and training on the program, creating a smooth onboarding process for both carrier and shipper. The average client using the program sees a 25% reduction in fuel costs in the first full year of the program, Breakthrough Fuel says.
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