January 25, 2012
OK, so the price of diesel (and gas) is going up again! We are back in the well over $3.00 per gallon range, with $4.00 per gallon coming at you. And you are probably wondering where the price of oil is going, and how to reconcile this dynamic operating expense with your planned transportation budget for this year.
One thing I have learned over the past year is that the wholesale distribution industry in general has no common approach to handling this growing operational expense. Nor is there a common practice for offsetting or passing this expense along to customers.
The original intent of carrier fuel surcharges was to help carriers offset the added expense of increasing fuel expenses from way back when. At the time, it seemed like a legit thing to do, and everyone expected that the rise in fuel prices would only be a temporary thing.
Over time, the resulting phenomenon known as the fuel surcharge has become a de facto accepted part of expected carrier freight expense. The problem is that if you don't understand how fuel surcharges are calculated, then how do you know if you are paying more than what's fair and reasonable?
Does whoever is charging you the fuel surcharge provide you with a standardized rate table that shows you (1) the peg rate (2) the incremental increase brackets as the cost of fuel changes, and (3) how the actual charge is calculated? If not, you need to do some homework and get answers to these key questions. If you have multiple vendors charging you fuel surcharges, how do the answers to the above questions compare? Are they similar? Or all over the board? If it's the latter, you have a real problem.
Bottom line: the first step in eliminating fuel surcharge pain is to get your act together and understand the root cause of your pain. The next step is to determine how to mitigate or offset this somewhat unpredictable operating expense before you take the all-too-often default solution of passing the cost along to the customer (unless you just delight in pissing off your customers). There are ways to reduce operating expenses both here and in other areas. If you don't know how to do that, seek help! The savings will far outweigh the expense of getting that help.
So, if you don’t have a standardized approach specifying what you think is a fair and equitable reimbursement rate for legitimate fuel surcharge expenses above the agreed-upon and justified peg rate, then you need a large jar of vaseline to ease your pain, because your vendors will definitely be sticking it to you! Your pain, their gain!