By Richard Koch | Associate Director, Logistics Operations | Chainalytics |
Unless you’ve been otherwise preoccupied, you know there’s an ongoing global fuel glut. Transport Topics reports oil prices have plummeted 45 percent over the past year. Meanwhile, U.S. diesel prices are hovering around $USD 1.70/gallon and the cost for diesel fuel based on Singapore benchmark (Gasoil)–the market most closely linked to Australian fuel prices–is around $AUD 94 cents/litre (plus about 1-2 cents for shipping).
Does this dramatic drop in fuel prices translate to financial benefits for Australian shippers, who outsource much of their freight to a select group of road freight carriers? In fact, no, it does not. Many shippers continue to eschew a simple review of their carrier fuel surcharges, missing potential savings of 3 to 5 percent out of overall transportation spend. That’s a lot of money. So what’s going on?
– Road freight carriers rely on fuel surcharges for making profits and don’t want to give up their revenue base. When fuel prices jumped worldwide several years ago, many Australian shippers switched from quarterly to automatic monthly fuel cost reviews. In recent years, fuel surcharges have served as carriers’ automatic rate increase. Many carriers are over-recovering on their fuel costs; others have a wide range of surcharges and negotiate each of these with their customers individually. Most trucking companies, airlines and rail carriers consider fuel surcharges a form of insurance–in effect, a way to hedge against the cost of fuel.
We recently conducted a freight procurement bid/RFP with 25 carriers, to see how their fuel surcharges reflected movements in fuel costs. Not surprisingly, we found that carriers used numerous ways to measure freight movements. To make matters worse, each carrier applied a different benchmark source for fuel surcharges and various methods to calculate fuel as a percentage of total costs.
The bottom line: After carriers increase their rates, they don’t want to bring them back down.
– Carriers trade on shippers’ lack of knowledge. While some Australian carriers have transparent fuel surcharges, many do not. And unfortunately, most shippers don’t understand the cost drivers of operating a truck. The problem is compounded by Australia’s complex, non-standardised, impossible-to-understand rate cards. Unlike their US counterparts, Australian carriers’ rate cards are so complicated that many buyers simply don’t understand how to reconcile freight payments, never mind fuel surcharges, which they often overlook in an effort to reconcile carriers’ invoices.
If you’re a shipper who hasn’t benefited from significant reductions in fuel surcharges recently and is seeking to recover lost cash, you really need to understand how fuel surcharges are calculated, otherwise you risk throwing away up to 5 percent of fuel costs unnecessarily. This year—with so much money at stake—you may find it’s time to go back to the negotiating table with your carrier. As we’ve said before, if think you may be overpaying, ask yourself when your transport provider last increased your rates. If you can’t remember, a review is probably way overdue.
Richard Koch is associate director for Chainalytics’ Logistics Operations competency, where he supports the firm’s continued growth in the Asia-Pacific region. Richard has over 25 years of supply chain consulting experience, including facility design and engineering, outsourcing and third-party logistics and supply chain network optimisation. He is also highly experienced with software evaluation and selection as well as operations management, with particular emphasis on freight and transport optimisation.