Offsetting Unpredictable Oil Prices

Jan. 29, 2009
Organizations that rely on LTL, truckload, air freight, ocean freight and small parcel shipping can take advantage of the softness in the transportation market in order to minimize the impact of rising fuel prices.

Unpredictable fuel costs are a fact of business-not just today, but always. Events of the past twelve months have only drawn attention to a harsh reality that has, in fact, always existed. Even if prices were to remain static for an extended period of time, organizations would be foolish not to accept the dynamic nature of fuel as a long-term reality and seek opportunities for savings elsewhere in order to minimize the impact that fuel costs have on their bottom line.

A best-practice approach can help any organization, that utilizes fuel, to stabilize their business and remain competitive amid drastic price fluctuations.

Current economic conditions have led to a softened transportation market, therefore, offering companies numerous opportunities to leverage the increased levels of competition. Suppliers want to keep their current business, and therefore may be more flexible than one might think. Organizations that rely on LTL, truckload, air freight, ocean freight and small parcel shipping can take advantage of the softness in the transportation market in order to minimize the impact of rising fuel prices. Also, gaining visibility into accessorial charges (which have risen almost 900% in some modes of transportation in the last decade) and achieving a better understanding of freight surcharges will further enhance buyers' negotiating stance and enable them to reduce overall transportation spend.

The first step in positioning your company to remain steady in the face of highly erratic fuel costs, involves gaining a thorough understanding of transportation cost structures like the mix of labor, equipment or accessorial and fuel costs that your shippers incur. Do you know what percentage fuel contributes to your freight costs? That knowledge is important if you're trying to push back on any 'fuel surcharges' your shippers are trying to levy. Or, take a look at last years' emissions rules for trucks. How hard was your carrier's fleet hit? They may be using emissions as an excuse to squeeze you for a few more bucks. Regardless, it pays to keep up with macro trends and understand how they directly impact your carriers.

At the end of the day your carriers need your business as much as you need their services. You can work with your service providers to gain a better understanding of how rising fuel prices are impacting their cost structures. Acting in good faith to share the burden of price increases can open opportunities to restructure contracts in an equitable manner and maintain long-term, mutually beneficial relationships.

Careful review of contract terms may unlock potential savings opportunities that can positively impact your bottom line, and pave the way for implementations such as a buyer-dictated fuel surcharge programs that standardize the price of fuel and require carriers to focus on the cost of their core service.

Armed with a thorough understanding of transportation cost drivers, you can leverage that knowledge to pursue the following opportunities for bottom-line savings:

  • Accessorial Charges -- If you're commonly getting hit with accessorial charges (weekend delivery, wrong address or any of the other a-la-carte fees), revisit those costs with your suppliers. They may play hardball on freight rates, but this is an area where they may be more willing to negotiate.
  • LTL Tariffs -- With all of your vendors working off the same tariff schedule, you can truly compare costs and weigh your options.
  • Consideration of Alternative Ports -- Flexibility here will allow you to take advantage of shifting truck and rail capacity. And with new routes coming online, you may have more cost effective ones to consider.
  • Service Level Visibility -- Are mavericks in your organization running up bills by shipping Next Day AM when it could go two-day ground? Without visibility into the premium services your company is using, you could be wasting money. Try implementing a system that provides visibility into the actions of your employees and either flags or prevents unnecessary or unauthorized transactions.
  • Demand Management -- Are your just-in-time shipments actually being rushed due to over-zealous employees? Could you delay three LTL shipments 24 hours in order to fill one truckload? Understanding what is required in order to fulfill your customer obligations provides opportunities for savings and greater efficiencies.
  • Competitive Sourcing -- While you can't competitively bid fuel, you may find opportunities for savings in the non-fuel components of your contracts. If you're buying a service that includes a fuel surcharge, break the charge out separately, tie it to an index that allows for fluctuation and then bid the rest of the cost of the service.
  • Fuel Surcharges -- Standardizing fuel surcharges across vendors will give you a level playing field to comparison shop. And reviewing it more frequently -- say weekly rather than monthly -- will give you greater insight and leverage with your shippers. Some companies are using the spiking fuel prices to introduce surcharge tables that are well above true market rates. Fuel surcharges are an area where carriers have leeway to negotiate. In a time of dubious cartel behavior (different surcharge tables, different surcharge pricing models and changing commission incentives for forwarders) you should be in a strong position to make your case internally if management still isn't onboard. Carriers likely have excess capacity and will do what it takes to keep your business.

Aside from transportation-related cost-savings, you can pursue other spend management tactics to offset the rising cost of fuel. If you find you are unable to directly combat rising gas prices, begin looking for savings in other areas. You can offset the unpredictable dynamic by driving cost reductions in non-affected categories of spend such as temporary labor, IT, legal services, print marketing, etc. You may be able to reduce commodity costs between 5% and 15% by, among other things, increasing the frequency of sourcing events, leveraging tools that provide clear visibility into enterprise-wide spending and streamlining the accounts payable process to reduce invoicing over-charges. These savings will help offset rising energy-related costs.

Also, be sure to watch the markets. By constantly monitoring key indices and market developments, you can proactively manage the impact of any changes on your contracts and re-evaluate them as appropriate.

Finally, keep in mind that there is no quick-fix solution for managing rising commodity prices. Effectively combating their negative impact requires a sustained commitment on an enterprise-wide, global basis. But by implementing sound sourcing strategies and sticking to them, you can mitigate the risk for your company and lessen potentially negative effects on your businesses.

Rachel Rutkoski is a Category Manager for Transportation and Logistics in Ariba's Global Services Organization. Rachel regularly writes about transportation issues on Ariba's blog.

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