Fuel Recovery is the only shipment specific, market-based diesel fuel reimbursement program in the industry. Using actual fueling station data from across North America, updated daily, we bring accuracy and transparency to an otherwise distorted practice that puts undue risk and cost into shippers’ supply chains.
Breakthrough recognized there was a gap between averages and actuals in the fuel market. When an organization uses a fuel surcharge schedule based off the DOE’s weekly national retail price, they use an outdated, antiquated system that began in the 80’s and was never actually intended the use we see widely employed today.
Interested in learning more about the history of the DOE Fuel Price Index? Read about it on our blog.
Despite its accepted use across the industry, the old way of paying fuel surcharges based off the DOE Index is distorted and introduces inaccurate cost into transportation spend. It is updated once weekly and produces a single national average price for diesel fuel based on a sample of less than 10 percent of all national fueling locations. With fuel making up between 15 to 30 percent of total transportation spend, that is a significant amount of cost centered around an archaic management method. The cost differential between a traditional fuel surcharge and the actual cost of fuel used to move a shipper’s freight can be as much as 40 cents per gallon – and in 2018 hit a high of 77 cents to close the year. Over millions of miles and thousands of shipments, those costs add up and magnify the inaccuracies in an organization’s transportation network.
Managing your fuel spend is crucial in establishing methods to reduce costs, create fairness for your carriers, and adhere to industry best practices. To accomplish this, shippers must eliminate four key distortions from their fuel management strategy.
Eliminating 4 Key Distortions from Fuel Reimbursement Calculations
The common fuel surcharge program, based off the weekly DOE Diesel Fuel Price index is distorted in four key areas.
- Price Distortion: The DOE’s national retail diesel price average does not represent how well managed carriers procure fuel.
- Tax Distortion: One national average is unable to account for taxes by state, which vary by as much as 65 cents per gallon across the US.
- Time Distortion: Fuel prices fluctuate every day, and one average weekly price loses fluctuations driven by key market events.
- Geographic Distortion: Fuel prices vary across the US, meaning some lanes are being over-reimbursed, while others may be under-reimbursed.
Breakthrough Fuel Recovery calculations are based on the price, tax, time, and geography specific to each of your freight movements. Using some basic pieces of your shipment data, we determine where and when your freight travels, and then calculate the cost of diesel fuel specific to that individual movement. We tap into thousands of fueling locations across the United States to give your organization visibility to the actual cost of diesel fuel used to move your goods to market.
Calculating the Market Price of Fuel
The DOE Diesel Fuel Price Index is a retail index; however, most well-managed carriers procure fuel at a discount, often near the wholesale level. Shippers should reimburse their diesel fuel spend at the same cost their carriers incur at the pump and experience on a shipment. Using retail indices in a fuel surcharge schedule calculates a reimbursement that exceeds the actual cost of fuel, often by 25-45 cents.
Accounting For State Taxes
Carriers pay fuel taxes according to where fuel is consumed, and taxes can account for anywhere between 5 and 30 percent of the price of a gallon of diesel. States like California and Pennsylvania have significantly higher state taxes than states like Oklahoma and Missouri—a difference of as much as 65 cents per gallon. Paying a national average fuel price means you are either over or under-reimbursing your carriers on any given route because the national average price doesn’t accurately account for fuel taxes.
For example, hurricane season in the US sees significant price volatility due to outages in the gulf coast, much like the price fluctuations seen during Hurricane Harvey in 2017. Similarly, the anticipation of production increases or decreases made by the Organization of Petroleum Exporting Countries (OPEC) can push the market as stakeholders prepare for fluctuating supply and demand fundamentals.
These market drivers make the price of fuel vary seven days per week, 365 days a year. Using a weekly update based on the DOE Fuel Price Index overlooks this volatility resulting in fuel price risk for both shippers and carriers.
Fuel Prices Fluctuate from Station to Station, So Should Your Reimbursements
A gallon of diesel fuel in Los Angeles, CA has a different price from a gallon purchased in Houston, TX, or in Fargo, ND. To accurately account for geographic variance, Breakthrough Fuel Recovery uses shipment origin and destination data to ensure fuel reimbursements are only calculated from station data along your shipment’s route.
If you are shipping freight through Oklahoma, why include New York or Florida pricing in your reimbursement calculation?
3 Core Principles
While fuel management is only one of many data-driven solutions Breakthrough can bring to your supply chain, our clients find value with us because of our three core principles that infuse everything we do:
- Remove Distortion: Utilizing accurate fuel reimbursement calculations removes distortion from your transportation spend, ultimately bringing tangible data points and accuracy to the forefront of your strategy.
- Achieve Transparency: Fuel Recovery uses actuals, rather than averages, to give you the clearest picture of your freight flows and fuel consumption.
- Establish Fairness: Fuel Recovery establishes fairness in the relationship among shippers, carriers, and fuel. Carriers are made whole for the fuel used to move goods to market, and your organization ensures that you are paying the fairest price.
For more information about making Fuel Recovery part of your 2019 supply chain strategy, or any of Breakthrough’s other data-driven solutions, contact us!