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Staying resilient in a time of rising diesel costs

By Jeff Berman, Group News Editor
July 29, 2013

Over the last three weeks, the average price per gallon of diesel gasoline has gone up a cumulative 8.6 cents, according to data from the Department of Energy’s (Energy Information Administration).

As reported by LM, prior to the gains of the last three weeks (last week’s prices come out later today), the previous six straight weeks of declines were preceded by a two-week stretch which saw prices rise a cumulative 4.5 cents. And prior to the two-week stretch of increases, diesel prices declined for ten straight weeks and dropped a cumulative 31.4 cents. Prior to the previous ten weeks of declining prices, diesel prices rose a cumulative 26.5 cents over a six week span.

While these recent increases are far from welcome news for shippers to be sure, they certainly pale when compared to what they had to deal with five years ago during the summer of 2008 when the average price per gallon for diesel was pushing $5 and oil was nearly $150 per barrel.

With any luck, we won’t be revisiting those levels ever again….but you never know. In any event, shippers need to be mindful of the recent spike in prices in order to hedge themselves against future gains all the same.

In order to get a better perspective on that, I reached out to Brittain Ladd, a global supply chain consultant and one of the brightest minds in the business, especially when it comes to transportation and logistics sustainability and all things green.

As usual, Brittain was succinct and spot-on in describing what shippers need to do—and be mindful of—when dealing with increasing diesel prices as is the case right now.

“The primary challenge encountered by supply chain and logistics professionals in terms of rising diesel fuel prices is uncertainty in terms of how much the price of a gallon of diesel will increase and for how long will high prices remain?,” Ladd explained. “It is important to understand that a $10.00 per barrel increase in crude oil will result in a $0.24 per gallon increase in diesel fuel. The standard fuel surcharge methodology is to increase the surcharge $0.01 per mile for every $0.06 increase in diesel fuel prices. Therefore, for every $10.00 increase in a barrel of crude oil there is an increase of $0.04 per mile in transportation rates in addition to the $0.24 increase in fuel costs per gallon.”

On the surface, Ladd said, $0.24 and $0.06 appear to be small numbers but when multiplied over thousands of trucks and millions of miles transporting freight the costs increase significantly.

The primary strategy for shippers to combat raising fuel costs is to conduct supply chain network optimization to model the impact of rising diesel fuel and transportation costs, which he said is key as transportation costs become more important relative to production, inventory and facility fixed costs.

With that as the backdrop, Ladd said his recommended strategy for shippers is to “identify opportunities to increase the number of distribution centers to minimize distance travelled for outbound transportation and to make operational changes to trade down to lower cost transportation such as air to ground and trucking to rail. The challenge of course is that lead times and replenishment to meet customer demand must be analyzed and processes updates to adjust to the new transportation reality.”

Ladd concluded by suggesting that shippers make transportation and logistics analysis a standard practice whereby every quarter models can be run to identify opportunities to reduce transportation and logistics by incorporating real-world fuel and transportation costs to identify at what point it is projected that a change to the logistics strategy needs to be made to minimize costs. 

“Make no mistake, the companies that make supply chain and logistics optimization and the use of analytics a standard practice will always be able to able to reduce their costs lower than companies that fail to understand the importance of applying to science to their operations,” he said.

Sounds easy, right? Well, not entirely, but taking the steps to ensure that cost-savings opportunities are being at least researched truly has the potential to make life easier—and transportation budgets a bit more in the black, too.

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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