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The Basics

Freight Transportation is typically the single largest cost component of Supply Chain Management. Data from Logistics Management’s Annual Study of Logistics and Transportation Trends highlights that an average transportation spend is in the range of 10 to 11 percent of revenue for companies with less than $250 million in Sales and it is in the range of 2 to 3 percent for companies with revenues in excess of $9 billion. As a result, my colleagues and I are often amazed that freight expenses are undermanaged in so many companies.

Freight Expenses are Controllable, Manageable and Negotiable Costs

Regardless of mode, freight costs are typically comprised of three elements

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This year, major freight carriers have been seeking general rate (GRI) increases, higher fuel surcharges (at a time when energy prices are at their lowest levels in years), accessorial charge rate hikes and the implementation of dimensional LTL pricing. In other words, shippers, particularly in the small parcel and LTL sectors are facing a barrage of rate increases in 2015.

This brought to mind some words of wisdom I heard from Jerry Hempstead, President of Hempstead Consulting during the Logistics Management 2015 Rate Outlook webinar. Jerry made the comment that when it comes to freight rates, shippers “don’t get what they deserve, they get what they negotiate.” This sage advice has stayed with me since the call and is the inspiration for this blog. Here are a few thoughts to consider.

Data is Power

Shippers without good freight data are virtually defenseless in rate discussions. If you don’t have accurate data on the density of your freight, you are at the mercy of freight companies, their scales and dimensioning devices. If you don’t have quality data on your volumes by lane and on the various components (e.g. line haul charges, fuel surcharge, accessorial charges) of your freight spend, you are not able to able to manage your freight and communicate effectively with your carriers.

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Here are few statistics to consider. On June 27, 2014 a barrel of crude oil cost $107.26 U.S. On the same date, a gallon of diesel fuel cost $3.91 in the U.S. or $1.35 per liter in Canada. The cross-border (Canada/U.S.) fuel surcharge was 20.1 percent on LTL, 47 percent on truckload.

Last week, the price per barrel dropped to $50 while the price of diesel fuel fell to $3.13 in the U.S and $1.18 per liter in Canada. The cross-border fuel surcharge fell to 13.4 percent on LTL and 31.6 percent on truckload. This week the cost per barrel is trending below $50. The cost per barrel has dropped by over fifty percent in the past six months. In the same period, fuel surcharges have declined by about a third. Here are few thoughts that shippers need to keep in mind.

1. Shippers will receive a freight cost saving windfall in 2015

An energy expert suggested this week in Forbes magazine that we may see the cost of a barrel of diesel fuel fall to as low as $20 this year. While no one knows what the bottom is or how long energy costs will remain at these levels, the end result will be an unexpected cost saving bonanza for shippers. Enjoy it as long as it lasts.

2. What comes down will go up

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As the year 2013 winds down, it is time to reflect on the major transportation trends of the past year.  While I saw and read about a wide range of developments, these are the ones that resonated most with me.

1.Technology Comes to Freight Transportation

Last year I predicted that we would see a flurry of new technologies come to freight transportation.  They did and I wrote about some of these new companies on several occasions during the year.  Technology was successfully applied to the freight brokerage business, freight portals, LTL density calculations and to other segments of the industry., PostBidShip, Freightopolis, QuoteMyTruckload,  and Freightsnap were featured in various blogs during the year.  They are changing the way business is done in freight transportation.  Watch for more of these companies to surface in 2014.

2013 has been called the Year of the Network by numerous supply chain and transportation industry thought leaders.  Companies that built a successful supply chain trading partner network focused on three elements:

Connectivity— unite disparate systems and trading partners

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In the most recent Transportation Buying Trends Survey undertaken by Canadian Transportation & Logistics magazine, there is an interesting set of questions that pertain to fuel surcharges. Over 68% of shippers support the view that “fuel surcharges are necessary as long as fuel costs continue to be highly volatile.”  Slightly less than half of the survey respondents believe “carriers apply fuel surcharges correctly.”  Over 61% agreed with the statement that “fuel surcharges are a way for carriers to squeeze additional revenues from their customers to improve their profits.”  Over 55% of shippers support the view that “carriers should adjust their freight charges to market rates that include fuel surcharges and as a result simplify their billings.”

Perhaps the most interesting finding is that 25.8% of shippers have created their own fuel surcharge index.  Since I interact with both shippers and carriers in my daily work, I would like to weigh in on this topic.  This set of responses begs a few questions.  Should shippers be taking their precious time to create fuel surcharge indices and formulas?  How should shippers approach the topic of fuel surcharges?  What should shippers do to optimize their freight costs?  Here are my thoughts.

For shippers that use both private fleet and for-hire carriers, it is essential to be fully informed on all aspects of fuel costs and fuel surcharges.  Even for carriers that use exclusively third party carriers, there is a requirement to have some familiarity with the leading indices and the current surcharges being applied.  For Canadian and cross-border shippers, a subscription to the Freight Carriers Association of Canada’s weekly fuel calculation bulletin will provide you with one of the industry standards for LTL and truckload shipments.  For shippers that use intermodal service or are considering it in their freight programs, they should obtain a copy of the railway/IMC fuel surcharge formulas.  These differ (e.g. are lower) from the over the road surcharge numbers.

The next thing a shipper should do is to gain an understanding of the components of a freight rate.  One needs to understand that a carrier’s freight rate or tariff is based on several components.  There is the cost of pick-up and delivery, the line haul component, the cost for any special handling (e.g. residence, construction site deliveries, etc.) and of course, the fuel component.  For LTL and small parcel shipments, there are a number of other variables that come into play such as shipment weight, density, cube, packaging etc. 

Shippers need to understand that each carrier has its own mix of freight, its own fleet size and specifications (e.g. straight trucks, tandems, tridems etc.), its own head haul and back haul requirements in terms of both yield and volume and its own primary and secondary markets.  In other words, fuel costs and surcharges are a large piece of the puzzle but they represent one element of a carrier’s total cost structure.  At the end of the day, the carrier looks at each shipper’s freight and relates it to their costing model, business requirements, profit objectives and of course, market rates to determine their rate structure.

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