By Matthew Harding, Principal, Transportation Practice, Chainalytics
Wednesday, March 23, 2011
The crises in Japan and the Middle East have once again reminded us of both the unpredictability and interconnectedness of the global economy. Nothing happens in isolation. The transportation community is still weary from the recent memory of high and unexpected energy costs. During our recovery, the recessionary impacts of reduced consumption and low fuel prices offered little comfort as their brevity was no different than the prior spike upward. Volatility in energy markets, once an afterthought, has become a necessary core competency for logisticians.
Traditionally, this volatility has been met by the shipper community with a variety of “standard” approaches, mostly in the form of fuel surcharge programs. These programs, created to reimburse carriers for the change in fuel prices, vary greatly. Our research on fuel programs reveals a weighted average efficiency of 5.7 miles per gallon (mpg), and, for reasons that are older than my professional tenure, leave anything less than an average market price of $1.18 to the responsibility of the carrier. [i]
This process seems to work well with consistently low and stable fuel prices. Carriers may balk at submitting a rate when a shipper only reimburses fuel over $2.00, or they may balk at the efficiency demands as they trend toward the 7 mpg range. But it’s a mild annoyance for the carrier— linehaul rates are adjusted accordingly to reflect the gap in compensation with the hope that the future maintains some stability. Freight always finds a way to flow; carriers always adapt.
Unfortunately, shippers are at a disadvantage when fuel prices are high. Shippers’ fuel costs increase regardless of the latest fads in calculating fuel rates. Furthermore, their partnerships become vulnerable as carriers at both ends of the efficiency curve experience destabilizing effects. In this environment, shippers create huge opportunities for the efficient carriers—those who upgrade their fleets and achieve the highest performance levels –as many fuel programs dictate excessive reimbursement. On the other hand, shippers are at a risk of losing capacity when less-than-efficient carriers don’t receive adequate compensation.
While I am a huge proponent of market economies driving out inefficiencies, and we all applaud the success of investment and innovation, shippers must realize that one-size-fits-all fuel programs often lead to the instability of capacity availability when fuel prices increase. As consumers of transportation services, a shipper’s only option to maintain a competitive market position is to learn which carriers are efficient, and which are not, and how to bring the appropriate level of competition to bear. Shippers who cannot do this well will end up paying for more than just fuel.
[i] It is important to note that 84% of Chainalytics’ Model-Based Benchmarking Consortium members imply efficiencies between 5-6 mpg for dry van fuel programs and the base rate ranges from $0-2.40.