Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.
Mike Coronado thought he and his staff had the fuel surcharge problem licked. Back in November when they were drafting their business plan for 2008, Coronado, who is director of distribution for The Container Store, and his colleagues put a lot of They analyzed their surcharges for the last five years, sifted through the data looking for patterns, and then made careful month-bymonth projections for the upcoming year. But in the end, it wasn't enough. Just months into the new year, it became clear that their projections were falling well short of reality. "As good as it was, who would have projected a 53-percent fuel surcharge?" asks Coronado.
The Container Store is not alone. With diesel fuel prices spiking above $4 a gallon, shippers from coast to coast are getting walloped by fuel surcharges. Nearly 88 percent of the DC VELOCITY readers who responded to an online survey in April reported that their surcharges had increased in the past three months. The respondents said they were paying fuel surcharges of 24 percent above current freight rates on average. (For more on the survey results, see the sidebar titled "sharing the pain.")
But while shippers may feel they are paying exorbitant sums, some carriers say that fuel surcharges aren't keeping pace with their actual costs. "Ironically, few believe that fuel surcharges are fair or equitable right now," says Jim Butts, senior vice president of transportation for C.H. Robinson, a non-asset-based third-party logistics service provider. "Shippers feel they are paying too much in freight costs in general, and fuel surcharges are a large component of that. And carriers feel that revenues don't seem to be keeping [up with] rising fuel prices."
No one denies that soaring surcharges are adding up to substantial money, however. "It's not like we're $50,000 over plan; we're talking $600,000 to $800,000," says Coronado. "It's a huge number. So it's something that we as an entire company are focused on."
But however much companies like Coronado's focus on the problem, the question remains: Is there anything shippers can actually do about fuel surcharges? Or is the only option what one wiseacre survey participant suggested: "Pray a lot."
sharing the pain
If you're feeling the pain of rising fuel surcharges, you're not alone. In an online survey conducted among DC VELOCITY readers in April, 88 percent of the 206 respondents reported that they had seen increases in their fuel surcharges in the previous three months. On average, respondents said they were paying fuel surcharges of 23.8 percent above current freight rates.
Among other findings, the survey indicated that there's little uniformity in the way fuel surcharge programs are structured. Close to half (52 percent) of the respondents reported that their fuel surcharges were adjusted on a weekly basis. Another 35 percent said their surcharges were adjusted monthly, and 12 percent said adjustments were made on a daily basis. Only 18 percent of the respondents said their fuel surcharge programs contained a cap.
One obvious way to control fuel surcharge costs is to reduce shipments. And in fact, 24 percent of the respondents reported that they had deliberately cut down on the number of shipments they made in order to rein in fuel surcharge costs.
Asked what other techniques they were using to control freight costs (and by extension, fuel surcharges), respondents cited a variety of strategies. The most popular answers included consolidating loads or implementing an internal efficiency program (28 percent), and negotiating prices or shopping around for better rates (18 percent). Other responses included changing routes, redesigning the supply chain network, using software, and passing on the costs to customers.
Not all of the respondents were equally enterprising in their responses to the problem, however. A full 20 percent admitted that they were doing nothing at all to control their surcharge expenses.
Time to renegotiate?
As is often the case, the answer depends on whom you ask—and how far you're willing to go to solve the problem. Most observers agree that it's unlikely that shippers will be able to convince carriers to renegotiate their surcharge programs, regardless of what they might have done in the past. "Once upon a time, when it came to fuel surcharges, companies were willing to negotiate, and you could set your fuel surcharge," recalls Doug Bell, distribution center manager for General Paint, a Canada-based paint manufacturer and retailer. "Of course with the volatility of fuel nowadays, I doubt there's a carrier out there that's comfortable doing that."
But that's not to say surcharge programs are set in stone. In fact, Gary Girotti, vice president of the transportation practice at analyst firm Chainalytics, urges shippers to review their existing agreements with carriers to make sure they're in line with industry standards. For example, he says, there are probably truckload carriers out there that are still using an older method of calculating surcharges— that is, they're calculating them as a percentage of the total freight cost rather than pegging surcharges to the current price of diesel (see sidebar for a look at how fuel surcharges are calculated). If so, their customers have legitimate reason to ask to have their agreements revised. If you haven't gotten off a percentage basis for truckload shipments, says Girotti, you should, because the cost of freight has little to no bearing on how much fuel is needed to haul a particular load.
Girotti also urges shippers to make sure that their "escalators"— the price points at which surcharge provisions kick in—are reasonable. For example, a typical agreement might call for the shipper to pay the standard base rate of $1.20 per gallon and then pay an additional penny for every 5- to 6-cent increase in the per-gallon price of diesel. "If you have a 6-cent escalator, you are probably paying about right," he says. Girotti notes that during 2004-2005 when carrier capacity was a problem, some carriers convinced shippers to drop their escalator point from 6 cents to 5 cents, arguing that the new requirements for low-emission engines were making them less efficient. "But there's no data to support that," he says.
Go to market
If renegotiating fuel surcharges isn't feasible, renegotiating freight rates might be. In fact, several survey respondents reported that they had renegotiated their freight rates this year and that it was well worth the effort. "As the economy slows down, discounts have increased. It helps offset the fuel surcharge," wrote one survey respondent.
Girotti says that Chainalytics has helped 15 to 20 of its clients with their rate negotiations this past year. "All are getting double-digit savings in [the form of] rate reductions," he says. Those lower rates have taken some of the sting out of rising fuel surcharges.
While there is still time to take advantage of lower rates, this wave may be running out."Given the amount of carrier failures that are happening in the market," says Girotti, "we're starting to see a rate bottoming, where the carriers aren't going to be able to go much lower."
Whether they're preparing to renegotiate an agreement or simply getting ready for the next round of regular contract negotiations, shippers will face complicated tradeoffs between rates and surcharges. Although some shippers have tried negotiating lower base rates or escalators, Chris Caplice, who is executive director of the Massachusetts Institute of Technology's Center for Transportation & Logistics, warns that this strategy can backfire. Research conducted by Caplice and Chainalytics shows that shippers that pay lower fuel surcharges generally end up paying higher line-haul rates.
Rethink your operations
Even if they can't negotiate lower rates or surcharges, there are still plenty of other things shippers can do to control costs. To begin with, they can look for ways to reduce the number of shipments they make. In fact, nearly one-quarter of the respondents to DC VELOCITY's survey are cutting back on shipments in order to rein in fuel surcharges. "You can't control the cost of fuel," says Coronado, "but you can control the number of truckloads that you're processing."
Coronado reports that in the last few years, The Container Store has developed a number of techniques for cutting back on shipments. For example, it has implemented a program that has reduced the number of trucks returning to its Dallas DC from stores by 50 to 60 percent. It has also begun using a transloading partner to consolidate shipments of its Elfa shelving units from Sweden. "What we have been able to do is to reduce the number of containers from Sweden to the United States, which has had a dramatic impact on freight costs," says Coronado. The retailer is also using a new demand forecasting and demand truck scheduling program that has enabled it to ship products on a just-in-time basis and do a better job of determining precisely which products a given store needs.
Electronics manufacturer Philips has also found that consolidating shipments can take a big bite out of freight costs. "Five to 10 years ago, it wouldn't be unusual to have two and three and four shipments going out the same day to the same customer, shipped independently of each other," says John Brooks, the company's director of distribution and transportation. Over the last couple of years, Philips has worked to combine order drops to distribution centers, consolidate loads, and reduce the number of shipments to customers.
"A lot of customers prefer once a week or twice a week to receive deliveries from companies like ours," Brooks says. "So we have worked to really put them on more of a scheduled shipping process, and that's helped with transportation costs as well as minimizing the impact of rising fuel prices."
Butts of C.H. Robinson urges shippers looking to control freight costs to consider whether there are ways they can help their carriers hold down expenses. These could include reducing deadhead miles, cutting down on dwell time, or simply making sure that dispatchers provide drivers with clear information and directions. The more efficient the carrier's operation, the lower the shipper's costs.
Along with consolidating shipments and working to improve efficiency, a number of shippers are re-evaluating their modal choices. Girotti is an advocate of this approach. He's urging his clients to take a closer look at intermodal. In the past, shippers tended to shy away from intermodal because of its reputation for inconsistent service. Now, however, the cost advantage is too big to ignore, he says. In addition, a drop in imports from Asia has freed up capacity, which has enabled the railroads to bring service levels up a notch.
Still others are rethinking their entire supply chain networks. Several survey respondents said they were changing their routes, sourcing closer to home, or evaluating DC locations. "We're starting to look at, instead of reducing distribution centers, do we need to have more distribution centers because the closer you are to the customer, the lower your transportation costs," says Brooks.
Wrong answer!
Despite the many options available to them, it appears that when it comes to the problem of soaring surcharges, a sizable number of shippers have opted for the prayer route. A full 20 percent of the survey respondents, for example, said that they were doing nothing to counteract rising freight costs.
In Coronado's opinion, this is the wrong answer. "You just can't throw your hands up and say, 'There's nothing we can do about this,'" he says. "There is nothing we can do about the fuel surcharges. But in your supply chain, you can really take a look at what you do …each and every day and see whether there are opportunities for improving efficiency."
making the calculations
So how are fuel surcharges determined? The details will vary depending on the carrier and the type of service— truckload or less-than-truckload (LTL). But in general, the process works as follows.
For truckload freight, surcharges are typically tied to the current price of diesel—usually the national average weekly retail on-highway diesel price published each Monday by the Department of Energy. Oftentimes, carriers establish a "peg" or base rate and then charge shippers a set amount for every X cents-per-gallon increase in the current average price. For example, an agreement might call for the shipper to pay the standard peg rate (which is around $1.20 per gallon) and then pay an additional penny for every 5to 6cent increase in the price per gallon. A peg rate of $1.20 may seem arbitrary, especially considering that diesel fuel routinely runs over $4 per gallon these days. But fuel surcharges were created back in the 1990s and that's a fairly accurate reflection of the price of diesel back then, says Gary Girotti, vice president of the transportation practice at analyst firm Chainalytics.
For less-than-truckload (LTL) service, fuel surcharges are typically based on a percentage of the total freight cost, rather than on mileage. With LTL hauls, freight moves through a network of terminals, which means there's often little correlation between the shortest route for a given shipment and the distance it actually travels.
As diesel prices soar, there are signs that some truckload shippers are rethinking their surcharge programs. For example, Chris Caplice of MIT's Center for Transportation & Logistics reports that he's recently seen an uptick in interest in tiered fuel surcharge arrangements. A tiered system might work as follows: When the price of fuel rises above the peg rate of $1.20, a shipper would pay, say, an additional penny for every additional 5 cents per gallon until the price per gallon hits $4. Then the shipper would pay an additional penny for every 6cent increase in the per-gallon price of diesel. There aren't many companies using a tiered program right now because it requires significant management time and information systems to administer, says Caplice. Yet he believes more companies will be looking into this option as fuel prices continue to rise.
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”