LM reader survey indicates shippers plan to adjust freight budgets to match up with fuel prices
January 19, 2012
In the freight transportation world, one of the most predictable things over the years is the unpredictable nature of the price per gallon of diesel fuel. That is the case once again now, given the fluctuation in fuel prices in recent months.
As of press time diesel has been below the $4 per gallon mark since November and prices have been heading slightly down more so than slightly up, but that has not been all that comforting to shippers, it seems. This was made clear in the results of a Logistics Management reader survey of roughly 345 logistics, supply chain, and transportation executives.
According to the survey’s results, 38 percent of respondents indicated that average fuel surcharges were more than 20 percent above base rates, with 12 percent saying they were 16-20 percent higher. And 16 percent of shippers said they were in the 11-15 percent and 6-10 percent ranges, respectively, with 12 percent stating that their average fuel surcharges were 1- 5 percent above base rates. And 6 percent said they were unsure of how much their average fuel surcharge was above base rates.
The current price of diesel, which is in the $3.85 per gallon range, is down from a recent high of $4.01 from the week of November 21 and was followed by weekly declines for six straight weeks, due to a recent uptick over the past two weeks in which prices rose a cumulative 7.1 cents.
What’s more, the current price is basically even with the most recent Short-Term Energy Outlook from the Department of Energy’s Energy Information Administration (EIA). The EIA is calling for average 2012 diesel prices to be $3.85 per gallon and then increasing to $3.93 in 2013. The 2011 average was $3.84. Looking at oil barrel prices, the EIA expects WTI crude to average $100.25 per barrel in 2012 and $103.75 in 2013, which are up over 2011’s $94.86 and well above the 2010 average of $79.40.
Even with the up and down nature of diesel prices at the pump, it is plain to see the underlying theme points to fuel prices continuing to increase, which means shippers need to keep their eye on the ball and plan accordingly for future price increases.
A key part of this for shippers is upping transportation budgets to cover fuel costs. The LM survey found that 65 percent of shippers—or nearly 220—expect to pay higher fuel surcharges in the coming months, with 74 percent—or about 250—planning on raising or adjusting freight budgets to cover higher-than-budgeted fuel prices.
There was some variation as to how much shippers planned on adjusting budgets, with 40 percent planning to raise or adjust freight budgets by 5 percent or less and 38 percent planning on a 6-10 percent hike. And 10 percent of shippers said they planned to modify budgets by 11-15 percent, followed by 5 percent planning on a 16-20 percent adjustment. Five percent on shippers said they intend to adjust budgets in the 16-50 percent range, and 4 percent intend on even more significant increases from 21-99 percent.
But adjusting budgets is only part of the solution when it comes to dealing—and living—with fuel price fluctuation, according to shippers.
“Right now we are looking at hedging diesel ourselves to see if it makes sense for us,” said Wayne Johnson, manager, carrier relations at Owens Corning. “This will involve us committing to a certain price on fuel at which pay to a certain rate at which point it is frozen at that rate for us. We are also focused on keeping our drivers on the road as much as we can and being profitable and not in detention, and we are also putting in more carrier pools and improving lead times to our plants from 45 minutes to the 20 minute range and get drivers in and out of our plants as quickly as we can.”
Other steps being taken by shippers to combat high fuel prices include things like focusing more on utilization and efficiency by doing things like driving empty miles out of transportation networks.
And with the price of fuel being fairly volatile over the last year, shippers are continually working with carrier partners on ways to better control fuel cost pressures whenever possible to get freight budgets better aligned going forward, according to Bobby Harris, president and CEO of non-asset based 3PL BlueGrace Logistics.
These measures are vital as fuel prices are likely to go up but to the extent which they do cannot be predicted.
“Geopolitical situations [in regards to fuel and oil price volatility] are such that it will continue to be a variable for some time to come and touches every part of the supply chain, including capacity and cash flow,” said Phillip Johnson, VP sales, land and transport services, at APL Logistics.
Subscribe to Logistics Management magazine
entire logistics operation. Start your FREE subscription today!