How to Standardize Fuel Surcharges
A wise person once stated that if you have two watches, you never know what time it is. When considering the effects of fuel surcharges on line-haul rates, this analogy is appropriate. If both are allowed to fluctuate, making sense of total freight spend and the intrinsic value of carrier relationships can be nearly impossible.
Leveraging freight spend in the carrier market is a common practice. Carriers that perform well want additional opportunities with desirable shippers to expand their fleets and improve operating models.
Over time, changes in both shipper and carrier flows improve procurement opportunities because carriers are looking for efficient freight. Visibility into an entire network creates better alignment opportunities.
Disparate fuel surcharges buried in contracts, however, are often difficult to manage for a few reasons:
- Freight rates are hard to compare internally because line-haul rates are not apples to apples.
- Freight rates are almost impossible to benchmark externally because there is no standard way to separate the influence of a fuel surcharge.
- Automated auditing ability is nearly impossible.
Shippers that have annual freight spend categories greater than $10 million may significantly benefit from standardized fuel surcharges. But they need a centralized procurement event and execution monitoring to level the playing field. This can be a daunting task if the overlying assumption is that fuel surcharges are individually negotiated to their lowest levels.
DRILLING DOWN FREIGHT SPEND
STEP 1.Determine if freight spend warrants standardization:
1. What is the concentration ratio of freight spend relative to carriers used within your network?
2. Differentiate freight hauled by primary and non-primary carriers.
3. Are national versus regional carriers considered as a focused strategy?
4. Do carriers reject freight in periods of tight/abundant capacity?
5. Do carriers always accept freight?
STEP 2. Determine the range of fuel surcharges and the impact on line-haul:
1. How much variation exists?
2. Can fuel surcharges be adapted to show differences in line-haul rates?
3. How does total cost measure against carrier performance and acceptance ratios?
4. Attempt to audit a subset of lanes for total costs against internal and external benchmark sources.
STEP 3. Step 3. Run a standardized procurement event with a shipper-mandated fuel surcharge program:
1. Put in place a reasonable market fuel surcharge program—third parties are excellent sources for this information because they typically deploy many programs.
2. Ensure that other areas on non-standard rates are fixed, including accessorials.
3.Make sure incumbents understand the business reasons for standardization.
4. Demonstrate to incumbents strong discipline in the procurement process by limiting communication that devalues competitive environment.
5.Don’t allow incumbents to respond with old line-haul rates and make adjustments to the new fuel surcharge program.
6.Ensure non-incumbents understand all cost and service elements of the new business.
7. Meet face-to-face with key respondents.
8. Provide information to all parties and allow sufficient time for a competitive response.
STEP 4. Establish awards and measure performance:
1. Be ready for post-implementation adjustments with good negotiating and “Plan B” carriers.
2. Reward performing carriers with more freight as appropriate.
3. Perform all the tests in Step 1 to measure degree of success.
4. Establish carrier score-carding with semi-annual reviews.