The price of diesel has fluctuated unpredictably since the beginning of 2022 — exaggerating the inaccuracies and distortions already inherent in traditional, index-based fuel reimbursement plans. Now, as shippers begin strategic planning for 2023, it’s time to reconsider whether these decades-old mechanisms are still relevant in a marketplace where prices shift lane by lane and day by day.
Inaccurate reimbursements based on an index don’t just eat into shippers’ bottom lines. They also produce an unequal distribution of risk, turning what should be a straightforward process of cost reimbursement into a transaction with winners and losers. By improving shipping data transparency and gaining a more accurate view of fuel costs, shippers can save money and put their relationships with carriers on a firmer, fairer footing. At the same time, shippers can lay a foundation for emissions reduction and other sustainability initiatives that depend on real-time, accurate transportation data.
The problem with fuel price indexes
Most fuel reimbursement programs still rely on an outdated national index created by the U.S. Department of Energy. Adopted in the early 1980s, this index is only updated weekly, so it doesn’t capture daily price fluctuations. And since it’s national in scope, it also doesn’t take into account regional variation in fuel prices, including local taxes. Even as an average, it’s incomplete. There are over 5,000 truck-accessible diesel fueling stations across the country, but the DOE only uses a small number of these locations to calculate the index.
When fuel prices are relatively stable, reliance on the DOE index still creates significant price distortion. The kind of price volatility we’ve seen this year throws these problems into overdrive. Carriers may be drastically over- or under-reimbursed for fuel depending which lanes they operate on at which times, and no one — shipper or carrier — has real visibility into actual fuel costs. Instead, all parties play a complex game in which risks are unevenly shared and profits are unpredictable.
Taking the first steps toward greater shipping data transparency
Too often, shippers regard fuel prices as something uncontrollable, like the weather. So they aren’t surprised when indexes like the DOE’s prove as unreliable as a meteorologist’s forecast. However, there’s no need to accept this status quo. Shippers can start the transition to a fairer, more accurate system by examining their existing data more critically and using it in more strategic ways.
Start by asking why your organization relies on its current sources for fuel pricing and other transportation data. Is there a compelling reason for these choices, or is it just the way things have always been done? Look around for easy ways to improve your data posture, for example, by gathering more timely data.
Also consider the quality of any forecasts you’ve been relying on. For fuel pricing in particular, forecasts should take into account seasonality and cyclical aspects of energy costs, as well as supply chain and other risks. More granular regional or even lane-level information is most useful, if it’s available. These richer data points can begin to inform both fairer reimbursements and a more nuanced, market-sensitive fuel strategy.
3 ways better data benefits shippers
As your organization contends with fuel price volatility, improving data transparency should be a top priority. Here are three ways this approach can improve your organization’s supply chain operations:
Laying foundations for a stronger fuel strategy: Having a better handle on your transportation data enables you to think more strategically about your organization’s use of fuel. For example, by examining your supply chain data and demand forecasts, you can likely get an idea of how demand for trucks will fluctuate over the coming year and how that in turn could affect fuel consumption. Combined with a more accurate fuel pricing forecast, identifying these patterns can help you factor overall fuel costs into ongoing budgeting, enabling you to adapt your spending as financial goals change over the course of the year.
Building better relationships with carriers: Reimbursing fuel costs based on outdated indexes creates unnecessary friction between shippers and carriers. The closer you can get to reimbursing carriers at true market rates, the easier it will be to build a fair and equitable partnership. Incorporating real-time, lane-level pricing data where possible ensures the margin between the actual cost of diesel and the amount carriers are reimbursed is consistent and fair. This approach takes the risk off one party so it is shared more equally across players.
Planning for future sustainability goals: For most shippers, gaining a clearer understanding of fuel costs and consumption is the first step toward key sustainability goals like reducing scope 3 emissions. A close look at your data can tell you where tactics like consolidating shipments or switching to intermodal shipping will have the greatest impact on your carbon footprint. Investing in data transparency now will also set you up to harness the full potential of the significant changes to transportation likely in the next decade, including the proliferation of autonomous and electric vehicles.
Find the right partner to help build your data strategy
Infrequently updated indexes are no longer enough: Shippers need real-time, location-specific data to thrive in today’s fast-paced transportation market. Improving the accuracy of fuel pricing data and forecasts is an important first step toward greater shipping data transparency across your organization. And with big changes on the horizon for the entire industry, it’s also an important investment in your organization’s future.
Considering shedding traditional fuel indexes for real-time, lane-level fuel pricing data? You’ll want an expert. Schedule a Breakthrough Fuel Recovery demo to see how we can help bring full transparency to your supply chain data.