Fuel Surcharges | Why Small Freight Shippers Are Penalized

With diesel fuel pushing past $4/gallon, shippers are once again feeling significant pain in moving freight. While shippers begrudgingly accept the fact that higher fuel costs must equate to higher freight charges, what is not widely known is that it's the small shipper that primarily carriers the burden of the nation's cost of fuel, not the large shipper. Carriers get caught as well; many cannot recover the actual incremental leaps of a rapidly rising and significant element of daily operational costs.

All of this leads to a very interesting, but seldom debated question - why is it that shippers who do not have the expertise, know-how, staff, or just plain time available get stuck overwhelmingly with the short end of the stick when it comes to fuel surcharges? Perhaps a real life example will help illustrate the problem. GIANT Corporation has a billion dollar freight budget and commands significant discounts and pricing concessions with their carrier base.

They should, shouldn't they? After all they have considerable volume and economies of scale, so they should get a better deal. Their LTL pricing is based on a previous year's tariff, they get very high discounts, their freight is classed at lower NMFC rates, and their fuel surcharge scales are less than half the carrier's published tariff. And they are often even capped! The carrier simply doesn't get compensated for diesel pushing past $4/gallon so they have to seek it elsewhere.

GIANT Corp. may send a 1,000 lb. shipment from A to B. Due to their leveraged pricing their shipment cost is $100.00, and they have a fuel surcharge scale in place that adds 13% with diesel at current levels. So they are paying $13 for the incremental fuel cost on this particular shipment.

TRUE AMERICAN ENTREPRENEUR (TAE) is right next door to GIANT. Their freight budget is minuscule compared to GIANT at only $100,000 annually and cannot expect the same volume pricing that GIANT gets. TAE has pricing based on current year tariffs (which rise steadily as carriers institute annual or semi-annual GRI's), and has trouble negotiating huge price concessions. Oh they still get a discount, but the carrier is telling them that 75% off current tariff is the best they can possibly get for their size. And at NMFC class rates, with accessorials, and with a TARIFF FUEL SURCHARGE added of 32%!

TAE moves the same exact shipment as GIANT from A to B. Their rate on the shipment is $200 (double GIANT's) due to the fact that they don't have the same leverage. BUT, their fuel surcharge is $64 on top of that! Wait, isn't the intention of the fuel surcharge pricing model to compensate the carriers for a commodity and cost beyond their control? That's the purpose, but $64 vs. $13? Multiply that times the billions of dollars the TAEs of the country move and you have one heck of a burden on smaller enterprises.

But what should the compensatory fuel surcharge on this shipment actually be? Well that's math - it's a function of miles, carrier's MPG, density, trailer capacity, mode (TL is direct, LTL through a hub and spoke system), and the shipper's pricing program. Let's suppose the actual mathematical incremental cost of diesel on this specific shipment should be $30. Shouldn't both GIANT and TAE pay $30 as the fuel surcharge cost?

So in reality, the large shipper should actually be paying a higher fuel surcharge than the small shipper! Now how often do you think that happens? It should, and educating the marketplace is the first step to leveling the playing field in freight management. While there are published articles that indicate that you as a small shipper have no power at all to negotiate your own fuel surcharge scale, the actual truth is that you can.

Now what about the broker who is marking up LTL shipments and making money on the margin? Some of that fuel surcharge is then going in the broker's pocket. Don't get us started though- that's a subject for another day!

by Hank Newman, President - Recon Logistics

www.reconlogistics.com

Article Rating (5 stars):

Rate this Article:

Article Word Count: 672
|
Total Views: 9
|
permalink