Today’s post is by Mark Davis; Sr. Vice President of Operations and CTO at SafeSourcing
Managing your freight/shipping lanes is a complex process. There are so many factors that must be taken into account. Even then, when you have gone through all of the analysis and created projection models and spreadsheets you are still left at the mercy of weather, sales increases and declines and, of course, any possible factor that could influence the price of oil.
Because this last item represents up to 35% of a carriers charge to you, it is one that many companies take very seriously and invest great amounts of time and money in order to help them control. Some companies take the approach of locking a fuel rate into their cost for as long as they can to help protect against increases. Many other companies have negotiated their base rates and keep the fluctuations of fuel separate, with controls placed around the formula used to calculate it. Today we will be looking at the pros and cons of both the Fuel-In and Fuel-Out methods.
Fuel-In – Fuel-In strategies are founded on having a final complete rate inclusive of fuel costs. This is nice for companies who want a fuel cost method that is easy to manage, because the cost of each shipment for the negotiated period should always be the same. Typically this method will either be re-negotiated at pre-fined intervals, or tied to an oil/fuel related index with language to cap how much the rate can increase or decrease.
While this strategy can be used to help protect a company during periods of time when fuel prices are rapidly increasing, it usually leads to higher overall rates for each negotiated period. Without the flexibility to adjust with the average cost of fuel, vendors will generally error on the side that protects themselves and deliver higher than normal rates in their proposal.
Fuel-Out – Fuel-Out methods usually include a fuel surcharge that is based on some pre-defined fuel index such as the commonly used U.S. Department of Energy National Fuel Average price. Using the agreed upon price, most formulas will subject a “trigger” amount which is the rate of fuel above which carriers begin to include the surcharge. Typically this rate will be between $1.20 and $1.25 per gallon. This amount is subtracted from the average fuel price and then divided by an agreed upon Miles Per Gallon rate (usually 5 or 6 MPG) which leaves the surcharge per mile charged.
Although this means that the price of shipments can fluctuate more often and that companies aren’t protected against a dramatic increase in fuel like the Fuel-In method, they will be able to take advantage of decreases in fuel that the method above doesn’t always allow. The other advantage with this method is that it allows companies to get much more competitive base rates from carriers who know their fuel costs will be allowed to adjust the changing costs of fuel.
For more information about how we can assist with sourcing your freight lanes, please contact a SafeSourcing Customer Service Representative.
We look forward to your comments.