The 2:00 Minute Warning

In prior Two Minute Warnings, we’ve stressed the importance of scenario planning. And that is still the right message today.

Last week, we pointed out that diesel had jumped 96 cents in one week, the biggest increase on record. Since then, it has not meaningfully eased. Diesel was at $5.37 last week and has now climbed to $5.45. That tells us this is not a short-lived disruption. It is a cost issue companies need to manage now.

And fuel surcharges are moving right along with it.

We checked with LTL carriers, and just four weeks ago fuel surcharges were around 31 percent. Now they are at 45 percent. That is a 14-point increase in a very short period of time. If you are not paying attention to how your fuel surcharge formulas work, your freight costs can move up fast.

So if you are going to negotiate changes to your fuel surcharge formulas, here are three important things to know.

First, the official benchmark is the weekly diesel price published by the Energy Information Administration, or EIA.

A lot of shippers assume the fuel surcharge is simply a pass-through tied to that public benchmark. In reality, many large carriers buy fuel through negotiated programs that can put their actual cost 20 to 40 percent below retail. Yet their surcharge programs are still pegged to the higher EIA benchmark. That gives you room to ask better questions. Depending on your situation, you may have options to adjust the peg, widen the spread between trigger points, or revise the gaps that drive percentage increases in your fuel surcharge formula. 

Second, cash flow matters, especially to smaller carriers.

Many smaller carriers are paying their fuel bills on a 7- to 15-day cycle, while their customers may not pay them for 30, 45, or even 60 days. When diesel rises this quickly, that creates real pressure. Faster payment terms will not eliminate fuel surcharges, but they can help support lower fuel surcharges by improving the carrier’s cash position and reducing some of the pressure they are carrying. Just as important, the higher fuel surcharges associated with delayed payment terms are often much, much greater than the savings associated with extended payment terms.

Third, geography matters.

Diesel prices are not uniform across the country. If your freight is moving through higher-cost states such as California, staying with a national average may make sense. But if your freight is concentrated in lower-cost regions, your formula should take that into account. Too many companies use a national benchmark without asking whether it reflects where their freight is actually moving.

The bottom line is simple. If the price of oil approaches $175 a barrel — or more — and this pushes your freight costs up by as much as 20 to 25 percent, that is not a problem that solves itself. It quickly becomes a bottom line issue that requires immediate action. 

And if some of this starts to sound overly technical — peg rates, trigger points, spreads, or how the gaps in a formula drive percentage increases — call TranzAct. We understand how these formulas work, where the pressure points are, and where there may be room to negotiate.

Your team may absolutely be able to solve this. The question is whether you want to wait for the analysis to come together internally, or move now with outside support. In a market like this, time matters. 

One more thing: we’ve put together a fuel surcharge infographic with useful information that has been very well received. If you’d like a copy, please reach out.

To get in touch, give us a call at 630-833-0890, send us an email, or schedule a conversation.