Logistics Management - June 2010

Peak Oil, continued
time addressing the real problem—how
to optimize overall transportation and
reduce fuel consumption. I propose that
shippers and carriers stop the bickering
and join forces to work collaboratively.
Fuel surcharges first became a hot
topic in the transportation industry in
the mid-1970s, when the U.S. Department
of Energy (DOE) created the
National Retail Average to compensate
carriers for the volatile fuel prices
of the OPEC oil crisis era. It operates
the same way today as it did back then:
Each Monday, a representative group
of approximately 350 retail diesel outlets,
including truck stops and service
stations, report their retail diesel prices.
The DOE then uses that data to issue
the national average diesel price for
that week.
This process became, by default, the
baseline for the weekly fuel surcharge
rates billed by the carrier. Today, fuel
charges change on a weekly basis with
most LTL carriers, and can vary as
much as 25 percent from carrier to carrier.
Under this scenario, if fuel prices
increase during the week, the shipper
wins and the carrier loses. If fuel prices
fall during the week, the carrier wins
and the shipper is the loser.
Fuel surcharges are calculated as a
percentage of the shipment charges
expressed as a percentage of the total
shipment cost. As I write this article it
just so happens to be in the 22 percent
range. The less your shipment charge,
the less the fuel cost portion. The
higher your freight class, the higher the
cost per shipment and the more you
pay for fuel as determined as a percentage
of the shipment cost.
Couple this with using conventional
rate classification approaches and pricing
freight gets even more polluted.
Today there are 18 rate
classifications ranging
from a low of class 50 with
a cost per hundred pounds
of $63.71 to a high of class
500 with a cost per hundred
pounds of $525.66
with no discounts. Your
class of freight and your
freight all kinds (FAK)
range can reduce you total
spend.
Let’s look at an example
of how this works. If
you have multiple freights classes, say
class 50, 70, and Class 100, some carriers
will give you a FAK Class 50. If
you have a Class 100 shipment the cost
would be $239.88 with a fuel cost of
$52.77 for a total of $292.65.
Using the same carrier with a FAK
50, the shipment would cost $138.57
with a fuel cost of $30.49 and a total
cost $169.06. You could also see a 25
percent reduction of the fuel that some
carriers offer. To make matter worse,
carriers toss in discounts of up to 90
percent.
This is a great example that shows
that conventional approaches to pricing
freight is analogous to a playing a
shell game; sometimes things appear
and sometimes they don’t. Depending
on how shippers and carriers play the
game, there is a winner and a loser.
This approach is myopic and inefficient
and encourages discontent, finger
pointing, and distrust between shippers
and carriers.
Optimize transPOrtation,
reduce fuel
The transportation community
should instead work together to figure
out how to optimize transportation
and reduce the amount of fuel used.
Perhaps it’s time that all organizations
involved in the LTL mix explored a better
way of working together and tied it
to a national goal to reduce fuel consumption.
I love the concept of “vested outsourcing”
that Kate Vitasek and her colleagues
at the University of Tennessee
are teaching. Using vested principles,
shippers and carriers work together to
find better ways to decrease fuel consumption.
The concept espouses transparency
and fairness, and the
transportation community
should rise to
the occasion to work
together to optimize
transportation and quit
playing a shell game
and bickering over fuel
service charges and
rate discounts where
the company with the
most muscle or political
clout wins.
For example, Wal-
Mart and UPS have started programs
to reduce carbon footprints. These
programs track the credits you can use
and help provide visibility that should
help reduce carbon and use less fuel.
I particularly like the lead that Wal-
Mart has taken in this area to focus on
packaging.
Wal-Mart wants its 60,000 suppliers
to cut the amount of product packaging
they use throughout the supply chain
by 5 percent starting in 2008, saving
the world’s largest retailer $3.4 billion
in the process. Wal-Mart’s five-year
plan will monitor suppliers and recognize
those who use less packaging, better
materials and more efficient sourcing
for the packaging they use. The
company estimates its move will cut
nearly $11 billion in supply chain costs
and prevent more than 660,000 tons of
carbon dioxide being released into the
atmosphere.
The example above tells how reducing
packaging 5 percent saved the
money due to better load averages and
more freight per trailer, allowing the
carrier to use the equipment more efficiently.
If shippers realize that LTL pricing is
based on density and value, then each
pound per cubic foot reduction saved
will allow for better carrier pricing and
greater load factor—and they can use
this better efficiency to help obtain better
rates.
It all adds up: Same trailer, more
shipments per trailer, better fuel cost
per SKU. Now, what if Wal-Mart would
take some of those savings and share
it back with the suppliers and carriers
who helped them optimize their transportation
M
—Derik Andreoli, Ph.C., is co-founder
of the energy think tank Energy Transitions
Northwest and faculty affiliate of the
Harvard Business School Microeconomics
of Competitiveness Program. He can be
reached at derikandreoli@gmail.com.
—Hank Mullen is President of The
Visibility Group and Freight Pricing
Experts, a specialized consulting firm
that seeks to use space occupied pricing
to drive transparency and visibility to
help companies optimize their transportation
efforts. He can be contatacted at
hmullen@thevisibilitygroup.com.
32 Logistics Management WWW.LOGISTICSMGMT.COM | June 2010