October 17, 2013
Well it’s been over a decade since carriers implemented the most recent version of Fuel Surcharge (FSC). How many shippers remember how and/or why this enigma first began? Yep, it started in the name of “fairness." More specifically, as a way to help carriers defray increased fuel (diesel) costs when fuel prices “temporarily” spiked and remained above an arbitrarily assigned baseline rate of the day. Looking back to the beginning of this century, many early FSC schedules reflected $1.20 per gallon as that baseline rate. Bet you can’t guess when the last time fuel (diesel) price was $1.20 per gallon? Therein lies the problem with the concept of FSC!
Back then, there were no set formulas or rules for calculating FSC, only the perception and expectation that the carrier should be compensated for this added operating expense that was beyond their control and necessary to sustain day-to-day operations to service their customers.
During this same time, carriers of all varieties cooked up their own FSC calculations and formulas to ensuring that they are MADE WHOLE for the incremental price of fuel over and above the baseline (PEG) rate.
Over time, we have seen the PEG rate change, we have seen the incremental increase rate vary, and we have seen the reasons for the charge become very creative. One savvy shipper, Dogwood Creamic Supply, Gulfport, MS (see quote below) has even made the analytical point that some carriers are even using FSC to boost their profit margins, which was not the intent of agreeing to the FSC in the first place.
“The idea of a fuel surcharge was to offset volatile fuel prices above a baseline based upon the average performance of the equipment at the time. That was nearly two decades ago. While the performance of the equipment has dramatically improved, there has been no reset to the baseline of the calculation.
So, Dogwood Ceramic Supply pulled the SEC 10K reports of three publically traded LTL freight companies. Our quest was to determine the fuel costs of the companies versus the fuel surcharge collected by the companies. Keeping with the calculating method of the LTL freight industry, the data was converted to percentages of revenue (freight charges). What did we find, besides the fact that fuel was a pretty consistent cost (as a percentage) between the three companies?
2010 Fuel Expenses = 17% of income. Fuel Surcharge Collected = varied 18.4% to 23.8% of freight charges.
2011 Fuel Expenses = 19% of income. Fuel Surcharge Collected = varied 24.2% to 32.1% of freight charges.
Whoa, there, little doggie. The fuel surcharge was to offset volatile fuel prices above the baseline. Instead, unless these three companies are lying in their SEC reports, it appears fuel surcharges being collected exceeded the cost of all fuel. ALL FUEL.
Suddenly what first appeared to be a legitimate charge is now appearing to be a "money grab.”
Perhaps it is time to put an end to all this nonsense?
Why don’t we do away with the concept of FSC and just bill at the actual price of the fuel paid? A pass-through would seem like a fair approach, and would eliminate a potential markup on actual expense incurred. Or, let’s look to some agreed-upon reference price such as the DOE weekly price index rate, national or regional, whichever was more representative of actual shipping requirements. Too simple?
By allowing the carrier to bill at actual fuel price paid we:
1. Standardize: standardize what the basis for fuel is for the carrier, like it used to be before FSC came on the scene.
2. Clarify: allow the carrier to better plan for and calculate price of fuel into their operating expenses, which goes into calculating the freight rate charge.
3. Simplify: simplify carrier invoices—back to Freight & Assessorial charges only.
4. Improve: simplify invoice audit for the customer.
5. Legitimize: Eliminate doubt in customers’ minds about the legitimacy of carrier charges.
6. Streamline: Eliminate the pain of FSC “pass-through.”
7. Unravel: Eliminate all the confusion related to FSC calculations, comparisons, and justifications.
8. Demystify: Eliminate the plethora of FSC charge schemes spread across various modes.
9. Fill in your own reason here: [-------].
Has anyone calculated the actual operating expense reduction opportunity within your organization that would result from eliminating just DOMESTIC FSC from your carrier’s contracts or agreements?
Process map your current workload as it relates to negotiating, invoicing, auditing, and payment of FSC. What is the actual cost of this charge to your company in terms of time, resources, and assets employed? So, what if it’s only a 1% savings in operating expense. That is a 1% direct to your company’s bottom line. Chances are the actual savings might be greater than 1%, particularly if your carrier is using the FSC to pad their profit margin!
Isn’t it time we did away with FSC as we know it?