How Shippers Can Address Transportation Fuel Costs in Their Next Carrier RFP
ByJenny Vander Zanden
April 5, 2021
The idea of energy management has become central to strategic conversations across boardrooms and industries. For every industry sector, it manifests differently, but for most, the message remains the same. In the shifting and evolving landscape businesses are operating in, energy costs are volatile and difficult to manage.
In fact, energy has long been considered an unavoidable cost of doing business and becomes incredibly complex to manage for the supply chain industry. On every shipment, energy needs to be accounted across multiple partners operating at different consumption levels, across multiple modes, and beyond. The inability to transparently see and manage energy consumption at this level quickly becomes a detriment to a shipper’s bottom line. As the Harvard Business Review described it.
“Large companies spend millions, or billions, of dollars directly on energy each year—and millions more indirectly, on supply chain, outsourcing, and logistics costs. Yet outside the most energy-intensive industries, the majority of firms approach energy as merely a cost to be managed. This is a strategic mistake that overlooks enormous opportunities to reduce risk, improve resilience, and create new value.”
Within the supply chain, transportation constitutes a large portion of the energy consumed. Despite being one of the most volatile line items on their budget, it continues to use dated mechanisms to produce a “fuel surcharge.” This is generally accepted across parties, which makes it easy to neglect in the annual RFP process to secure carrier capacity and prices their lanes.
The fuel surcharge is not only an inaccurate cost-sink for shippers, it is a cost factor that can fully be in their control. Many shippers have completely eliminated their surcharge in favor of more accurate, market-based calculations, and this can be a powerful addition to the annual RFP process during negotiations with carriers.
Getting Away from Gambling on Fuel Prices
Many shippers currently utilize the Department of Energy’s diesel fuel price index to calculate their average fuel surcharge. The problem with an index-based calculation is the final cost is an averaged number from across the entire country, uses outdated pricing information, and doesn’t account for actual lane-level energy consumption of trucks on the road for a shipper’s unique network footprint. This makes it nearly impossible for either shippers or carriers to accurately anticipate what their fuel cost exposure is year to year, and muddies the waters of wider price negotiations in an RFP.
When shippers and carriers have to guess what future fuel costs will be during their RFP, sometimes they win and sometimes they lose. With a market-based solution that uses real-time data and actual lane-level information, you take the guesswork out of it and ensure that all parties pay the perfect price on every shipment.
Fuel Certainty Leads to More Accurate Carrier Proposals
This shift also removes fuel from RFP-level negotiations. Eliminating fuel from the conversation frees carriers from its associated risks so they can provide more accurate linehaul rate information. Prices can solely be driven by supply, demand, and service, rather than the potential threat of fuel cost exposure. Better transparency leads to more dependable revenue predictions for carriers, the confidence that they will be reimbursed accurately no matter what happens to the price of diesel, and better certainty for shippers. It shifts the conversation to focus on network capability and the ability to meet service requirements. Carriers can then be chosen based on their ability to meet performance metrics at a reasonable cost. In established relationships, carriers and shippers will be free to focus on continuous improvement across their networks, like converting long length of haul routes to intermodal, avoiding deadhead miles, and adjusting fuel efficiencies.
A Smooth RFP Process for Carriers and Shippers
By addressing fuel during the RFP process, you can effectively take it off the table to foster more productive negotiations between shippers and carriers. Shifting to a market-based approach allows both parties to have confidence that fuel is truly a passthrough expense which enables more candid and transparent conversations surrounding the factors that are most important to capacity decisions: well-matched carrier footprints, fair market pricing, and achieving service levels in alignment with a shipper’s strategic goals.
Better information benefits all parties when it comes to strategic partnership decisions. Fuel should not be a point of contention among collaborative partners, and with the right data, it can become a competitive advantage in a volatile and dynamic industry.