December 1, 2008
enroute | Dealing With High Fuel Costs

Oil? We don't need no stinkin' oil!

oil? We don't need no stinkin' oil!

The rest of the country may be fixated on volatility in the energy markets, but some logistics pros say the best way to deal with the situation is to ignore it.

By Mark B. Solomon

What if oil were irrelevant?

What if oil prices were fixed for a time, in the way gold prices were set at $35 an ounce for decades? Or what if supply chains didn't need to run on oil?

All are preposterous notions. Oil, of course, is relevant. Supply chains would grind to a halt without it. And its price is not fixed. As the events of 2008 have demonstrated, oil prices can gyrate wildly even as they reach historically high levels.

That's left many managers wondering how they can get off the roller coaster ride that diesel prices have become. Traditional tactics like thrusting and parrying over fuel surcharges have produced little in the way of savings (but a lot in the way of ill feeling, as evidenced by shippers' complaints that fuel surcharges were climbing faster than the price of the underlying commodities). And market hedging carries its own risks, as United Airlines learned. The airline's strategy to hedge against higher fuel prices backfired this fall when oil began its precipitous decline from all-time highs. United was forced to buy fuel at much higher prices than those for trades in the energy pits, resulting in a write down of $519 million in its third quarter.

While no one should ignore the volatility in the energy markets, there's scant evidence that riding shotgun over month-to-month fluctuations in fuel prices is an effective way to manage transportation costs. But that's not to imply that shippers are without options. There is a better approach, some companies say: Instead of allowing fuel costs to become a distraction, simply manage the supply chain as if oil were not a factor.

Rajiv Saxena, vice president, global supply chain engineering for third-party service provider APL Logistics, says that's consistent with what he's been seeing. "By and large, the concerns about fuel have been a side thing" for shippers and their customers, Saxena says. He reports that until very recently, his company has not been asked to include fuel cost projections in the distribution models it develops for its clients. The one exception is a Japanese manufacturer that wanted a "snapshot in time" of fuel costs and their impact on its business.

So how are shippers coping with energy market volatility? Rather than worrying about costs they can't control, they're focusing on those expenses they can manage. They're taking a careful look at what, how, and where they are shipping. They're examining their operations for opportunities to consolidate freight, optimize loads, and cut unnecessary miles. They're collaborating with vendors and applying technology tools. By controlling your total transportation and logistics costs, they reason, you'll automatically save on fuel expenses as well.

Control what you can
One shipper that subscribes to this line of thinking is the U.S. Postal Service. "I can't think of anything we've done, both in our strategy and execution, that has been in direct response to the fuel issue," says Frank Scheer, contract officer, freight traffic management services for the postal service.

But the USPS certainly has not ignored cost management. The postal service, which spends approximately $40 million annually to ship such property as equipment, supplies, and vehicles, transferred transportation management three years ago from the General Services Administration to Ryder System Inc. and C.H. Robinson Worldwide Inc. Ryder and Robinson began aggressive rate negotiations with carriers and reviewed every bill of lading from the previous year to identify where they could improve routings and pricing. They also implemented more efficient loadoptimization practices.

Meanwhile, the USPS took a hard look at whether the property it was shipping really needed to be moved. That analysis led to a surprising conclusion: The agency was paying more for transportation than some of the items were worth, and it would be more economical to sell those items locally or recycle them. "Sometimes, you generate the most savings from the stuff you don't ship at all," Scheer says.

The combined efforts of the USPS, Ryder, and C.H. Robinson have saved between $3 million and $6 million a year in freight costs, Scheer reports. Because most fuel surcharges are based on the corresponding linehaul charges, he adds, the reduction in the postal service's freight bill has translated into significant savings in its fuel expense.

It's a similar story at Denver-based telecommunications giant Qwest Communications Inc., where a program to reduce inventory by relocating stock had the added benefit of cutting miles and fuel consumption. Scott Fleener, vice president, supply chain, persuaded one of Qwest's key suppliers, a manufacturer of DSL modems, to take ownership of the goods and keep them at Qwest's own facilities in exchange for an opportunity to reduce its inventory levels and accelerate product turns. In the past, the vendor had carried about 90 days' worth of Qwest inventory at its West Coast distribution center, while Qwest held an additional 60 days of product at its two fulfillment sites.

Now goods arriving from Asia through the Ports of Los Angeles and Long Beach bypass the vendor's DC and are whisked directly to the two Qwest locations. By removing the intermediate step, the vendor now is able to meet Qwest's needs while eliminating its inventory investment and cutting its warehousing costs. Qwest, meanwhile, has improved its order-to-cash cycle time, shortened delivery times to customers in 14 Western states, and improved service reliability—all while reducing the number of miles traveled and conserving fuel. Today, Qwest keeps 30 days of buffer supply at its fulfillment centers; it has not yet needed to draw on that inventory.

Eliminate wasted space
Other shippers have made headway in cutting their total transportation bills (and their fuel expenses, in the process) through more efficient load building, especially on trans-Pacific shipping lanes, where the cost of moving the average 20-foot equivalent container (TEU) has more than tripled in the past five years. Scott Szwast, director of marketing for UPS Supply Chain Solutions, says the cost for shipping a 20-foot container across the Pacific is now about 80 percent of the cost for the typical 40-foot box, the highest ratio he's ever seen.

To manage through the escalation, the UPS unit has developed a "supplier management" program for U.S. importers working with Asian suppliers. UPS will consolidate orders into fewer shipments of 40-foot containers, rather than opting for more frequent shipments of 20-foot containers, which may carry just partial loads.

Szwast says importers benefit both from economies of scale and from greater cost controls. "The fuel benefit is simply that the total surcharge and accessorial cost of shipping one well-laden 40-foot container is lower than that of shipping the same volume of goods as several smaller shipments," he says. The potential savings can be significant: At this writing, the fuel surcharge assessed on eastbound shipments by members of the Transpacific Stabilization Agreement was $1,084 for a 20-foot container and $1,355 for a 40-foot container (the surcharges are adjusted on a monthly basis). Consolidation in one 40-footer rather than two 20-foot shipments would result in a fuel surcharge savings of $813, with additional savings on base freight charges and other accessorials, Szwast reports.

For shippers that move their goods by truck, load optimization technology is a useful tool for driving out deadhead truck miles and, hence, holding down fuel costs. Erv Blumner, vice president of product marketing and transportation solutions for the software firm RedPrairie Corp., says many companies are shifting from a "set it and forget it" load-building strategy to a tactical analysis based on individual loads. The aim, he says, is to achieve the lowest transportation costs by taking advantage of current business conditions and daily pricing changes.

RedPrairie is pushing what Blumner calls its "continuous move" software, touted as a dynamic application that matches bi-directional routings to reduce empty miles. In addition, RedPrairie partner Shippers Commonwealth, which specializes in on-demand transportation management systems, has developed an application called "Caravan" that is integrated with RedPrairie's software. Caravan identifies companies in non-competing industries seeking capacity in both directions. This enables the trucker to build roundtrip loads with more than one shipper— saving money for both carrier and customer, Blumner says.

Michigan Automotive Compressor Inc., a Parma, Mich.-based maker of automotive air conditioning compressors, used a different approach to eliminating "dead air." Its savings came from a simple re-engineering of its so-called "milk runs" between Michigan and its suppliers in the Southeast.

MACI had been operating a weekly dedicated truck carrying empty packaging down south and returning with parts from its suppliers. However, the truck would often run at less than 50 percent capacity. The company decided to run the truck once every two weeks, so suppliers would have enough orders to fill the truck. "We add revenue, which offsets the fuel hit, and the other company saves money by not having to run its own unit," says Bradley Ries, manager, production control in MACI's Toyota Production System department.

In addition to reducing empty miles, the company has been working to cut its fuel bill by taking actions ranging from placing its most frequently used parts closest to the locations where they were being consumed—a process that shaved its distance traveled by half—to upgrading its dock door seals to reduce heat loss, a change that allowed the company to get rid of all its dock door heaters.

Because they move 70 percent of the nation's freight volume, truckers have a greater stake in managing miles than anyone. D&M Carriers, an Oklahoma City-based truckload carrier with 285 vehicles, uses a software program called Xatanet from Xata Corp. that not only provides drivers with dispatch instructions but also tells them where to buy fuel and how much they should pay and consume. The software saves D&M about $20 per fuel stop, which translates to about $500,000 a year in savings for its relatively small fleet, says David Freymiller, D&M's founder and owner.

Get closer to the customer
Rising fuel costs are prompting some companies to consider an even more drastic step: relocating manufacturing closer to end markets. For decades, manufacturers and importers built long-distance supply chains in the belief that cheap overseas labor combined with precisely timed deliveries would lessen their reliance on costly safety stocks.

But fuel costs have changed the calculus. Now, some companies are looking at reversing course and building up domestic buffer stocks, a move that would reduce the need to ship goods in less–than–full-containerloads over long distances. Although they would pay more in inventory carrying costs, in many cases that increase would be more than offset by the fuel savings. "We will see many companies revisit the decisions they've made during a different time," says Tom Jones, senior vice president and general manager of U.S. supply chain solutions for Ryder System Inc. "The appeal of Asia has certainly been tempered."

He's not alone in that view. A study by the global research and consulting firm Frost & Sullivan predicts that many companies in the heavy electronics, automotive, and aerospace industries will shift production away from China as higher fuel prices and working capital costs erode the savings from Asian sourcing. "Outsourcing to locations around the globe expecting profits and absorbing the increasing transportation costs would be an [overly] optimistic approach, if not foolhardy," the report says. Nonetheless, the firm conceded that shifting production closer to home markets might be a strategic misstep for companies that have already invested heavily in an Asian presence—especially if their factories are pumping out goods for fast-growing Asian consumer markets.

Use your noodle
In the end, innovation and ingenuity are the best defense against high fuel costs. Daily hand-wringing about high fuel prices, and the reactive measures that tend to follow, often mask the greater imperative: managing the business as efficiently as possible.

"My primary driver is not energy," says Fleener of Qwest. "I am focused on optimally managing cash-to-cash cycles and taking costs out of our system without compromising service quality. That's what we are supposed to be doing."

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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