How Fuel Management Sustains a Competitive Advantage Amid Crashing Markets
April 28, 2020
In response to the dramatic changes we are seeing in fuel markets, some shippers are finding themselves more prepared than others to weather the storm of volatility. Those shippers are saving millions in fuel reimbursements compared to traditional models. Last week alone that equated to anywhere from $60 to $80 savings per shipment. Compared to normal market conditions, that equates to a range of $30 to over $50 in extra savings on a per shipment basis due to the sudden drop in wholesale diesel prices.
This cohort of data references Breakthrough clients who utilize a zero dollar base rate and is controlled for the same fuel efficiency. For more information about base rates and how they distort fuel reimbursement calculations, read more here.
By using a data-driven, market-based approach to one of the most volatile line items in their budget. That line item is fuel.
When many aspects of transportation networks are adding incremental costs, significant supply chain disruption, and creating challenges for their teams to navigate, they were able to have confidence that their fuel budgets were accurate and reflective of an otherwise uncertain market.
How Uncertainty Affects Shippers' Operational Strategies
Right now, uncertainty in the market is unprecedented as it relates to the ongoing threat of COVID-19. In concert with the global crude oil price war between Saudi Arabia and Russia, the landscape for fuel prices is exposing just how distorted traditional transportation fuel reimbursements can be
For a deeper analysis of how these two events are specifically influencing fuel prices in geographies across the globe, read here.
As this fuel price uncertainty endures, the freight industry has been left with a host of questions yet to be answered, and more importantly, strategies and plans left in disarray. Consumer demand has created discrepancies in the goods moving to market, derailing procurement plans as capacity gets left on the table. In an industry where many shippers have manufacturing cycles several months long and still rely on annual RFP cadences to contract freight to move their goods, many organizations are not built to adapt to rapid fluctuations in the market.
This does not need to be the reality for shippers, and Breakthrough as created opportunities to balance out disproportionately used capacity in this time of crisis. Read more about the opportunity, here.
Many links in the supply chain depend on one another, so disruptions in one area can have cascading effects throughout your processes. This can create a headache when trying to mitigate the effects instigated by this level of market disruption. With that in mind, shippers will most adeptly navigate the challenges of the current marketplace when they minimize the variables that need to be addressed.
Eliminate Variables to Support Agile Crisis Management
Your first instinct is likely to monitor demand for your products and ensure there is capacity to get them to retailers and into the hands of your consumers. This is where most of your time should focus.
But as you mobilize your team to respond to market changes, it is easy to overlook how these changes influence key elements of your transportation strategy. While you are meeting capacity needs, the cost of fuel reimbursements likely gets overlooked, and the lower prices drop, the more it will cost your organization.
How Much Are Shippers Overpaying for Fuel Reimbursements?
Diesel fuel reimbursements can account for up to 30 percent of your overall transportation spend. Shippers who use a fuel surcharge schedule that utilizes data from the Department of Energy’s (DOE) Diesel Fuel Price Index are calculating a significant cost that doesn’t fully represent these dynamic price changes, and therefore are likely overpaying carriers.
Read a history of diesel fuel surcharges, why they are based on the DOE fuel price index, and why they shouldn’t be forty years later in 2020, here.
Because of the time-lag in the DOE index’s update, any price changes in the that occur between the Monday evening release and that same time the next week is lost in reimbursement calculations.
Numbers represent the cents/gallon difference between the DOE’s national average diesel fuel price and national average wholesale prices. Actual over-payment varies on a shipment by shipment basis.
During the week of April 20th shippers using the DOE index overpaid carriers by anywhere from 88 cents to over 107 cents per gallon on average.
In addition, the week of this posting fuel prices reached their highest discrepancy ever at over 114 cents per gallon. Over millions of miles, it becomes unaffordable to leave this distortion unaccounted for and unaddressed in shippers’ strategies.
The only way to eliminate the distortion and inaccuracies of this common reimbursement mechanism is to use a market-based approach like Fuel Recovery—the industry’s only fuel management program that uses data that is updated daily, geography dependent, and measured at the wholesale level.
Read how Breakthrough Fuel Recovery calculates our shippers’ fuel reimbursements with a market-based approach, here.
When you effectively remove fuel from your list of things to monitor in times of crisis, your team can reallocate their time toward more pressing challenges, and all partners can rest assured that they will be made whole on fuel, no matter what happens in the market.
We thank the transportation teams, truck drivers, distribution centers, and beyond for their dedication to ensuring frontline workers and people across the country have the goods they need in a time of crisis. Your work to keep us all healthy and safe is deeply appreciated, from all of us at Breakthrough.