Industry Insights - Fuel
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September 30, 2022
Your Fuel Surcharge Program Is Hurting Your Bottom Line. Here’s What You Can Do About It
The cost of goods is rising — and many shippers are citing volatile energy prices as a contributing factor.
With shippers navigating global supply chain disruptions and soaring diesel costs, the cost of consumer goods has experienced some of the highest monthly increases in decades. Yet even faced with these volatilities, many shippers are still using fuel surcharge programs to manage fuel costs. Based on outdated base rates and the full retail Department of Energy (DOE) index, this fuel reimbursement model distorts true fuel costs — resulting in shippers routinely overpaying for fuel.
As procurement and transportation leadership set budgets for the coming year, they need the appropriate mechanisms to manage energy costs and design a fair fuel reimbursement strategy. A market-based fuel reimbursement program ensures your fuel costs directly reflect real-time market movements. By implementing a fuel strategy that moves with daily fuel cost fluctuations, your organization can reduce the impact of regional market disruptions, avoid overpaying on fuel, and ensure transparency in your carrier relationships.
The history of costly fuel surcharge programs
Fuel surcharges were originally implemented in 1979 to mitigate risks to carriers, and they continue to be the go-to mechanism for fuel reimbursement. Yet market trends, fuel efficiency, and transportation equipment have evolved significantly since fuel surcharges’ inception. From 1987–2022, fuel efficiency has increased by 36% — from 5.5 to 7.5 miles per gallon (MPG) — and improved vehicle equipment has been a driving force in energy advancements. According to Breakthrough data, fuel efficiency for diesel trucks increases by an average of 3–4% each year. Today, diesel trucks can operate at 8.7 MPG to upwards of 9 MPG in optimal conditions, a significant improvement to the MPG average of previous decades. If you’re still using a fuel surcharge program, your fuel reimbursement costs aren’t following true market trends. As a result, you’re paying for gallons of fuel that aren’t being used. Breakthrough data shows that shippers who rely on fuel surcharge schedules pay higher per-gallon prices than shippers who follow a reimbursement strategy based on real-time market dynamics.
Further, market-based fuel reimbursement programs remove fuel assumptions from RFP negotiations. This reduces the ambiguity between shippers and carriers, and it delivers a transparent calculation for equitable fuel reimbursement. It also shifts RFP negotiations from discussing uncertain energy cost projections to setting targets for network and service optimization. With a transparent foundation and accurate energy metrics, you can ensure more efficient budgeting, more effective revenue forecasting, and trusted, service-based carrier partnerships.
5 tips for innovating your fuel reimbursement strategy
It’s easy to feel like fuel is an unmanageable part of your transportation expenses, but there are mechanisms to ensure you pay fair and accurate fuel prices. As you move into the budgeting cycle, it’s critical to examine your current fuel reimbursement strategy and determine if it’s meeting the needs of an evolving energy marketplace. With an eye toward 2023, your fuel mechanisms must be capable of adapting to energy volatilities and reflect actual costs. As you examine and reconfigure your fuel reimbursement strategy, here are five tips to keep in mind.
Ask the right questions. A thorough examination of your fuel mechanisms starts with curiosity. Do your fuel charge schedules apply to today’s energy market realities? Is there a better way to calculate fair fuel reimbursements? Are your fuel costs fair in relation to where your freight is hauled? Answering these questions will lay the groundwork for a fuel strategy that’s representative of the market.
Communicate the “why.” It’s critical to communicate the “why” behind reconfiguring your fuel strategy to your teams and carriers. Educate your internal teams and outside partners on how fuel surcharge schedules don’t keep up with market changes — and explain the financial and operational value of fuel mechanisms that move with real-time cost fluctuations.
Prioritize transparency. Transitioning away from fuel surcharge schedules toward market-based fuel reimbursement puts transparency at the heart of your transportation network strategy. With fair fuel prices as the foundation, extend true cost principles to other strategic initiatives — like network and service optimization and sustainability targets.
Determine the timing. You don’t need to wait until your RFP to address fair fuel reimbursement calculations. Instead, transition to market-based fuel reimbursement at a time that makes sense for your business.
Know your capabilities. Market-based fuel reimbursement requires you to be informed of granular, daily movements in the energy marketplace, and this can be difficult for busy teams with limited data. Leverage a strategic partner like Breakthrough to ensure your fuel costs are aligned with market realities, and that you have the market knowledge to optimize your transportation network.
Interested in learning more about market-based fuel reimbursements?
To learn how you can transition from fuel surcharge schedules to market-based fuel reimbursements, schedule a demo of Fuel Recovery — our transportation fuel management solution.
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