How to Manage Rising Fuel Costs: Tips for Shippers & Carriers
Elevated fuel prices are no longer a mere fringe concern for logistics professionals — far from it, in fact. Since 2020, spikes in the cost of fuel have disrupted global supply chain operations to the point of supplanting driver shortages as the shipping industry’s primary concern.
Read on for more on how rapid changes in fuel costs directly impact shippers and carriers, plus our team’s tips for minimizing the effects of elevated fuel prices on your supply chain.
A Brief Review of Recent Fuel Pricing Turbulence
The average retail price of diesel rose a record-breaking 55% in just six months in the summer of 2022. While this sudden climb’s peak was (rightly) considered unsustainable, it proved enough of a disturbance to rewrite the transportation industry’s status quo and keep diesel prices hovering far above pre-pandemic levels even now — much to the distress of shippers and carriers alike.
Civil unrest abroad, economic inflation, seasonal demands for summer and holiday travel, the shifting price of crude oil and even lingering ripples from the pandemic all contribute to the erratic nature of fuel costs. With so many interconnected variables to consider, even the experts have difficulty predicting fuel prices well in advance — you never know when costs might jump 16% in a matter of weeks like they did this past summer.
How Fuel Costs Affect Carriers
When fuel prices spike, it’s carriers who feel the initial sting. Fuel is one of carriers’ largest operational expenses and directly impacts their ability to transport cargo across the globe. Covering the inflated cost of fuel without raising rates is generally untenable, especially as carriers come crashing back down to their typical razor-thin, pre-pandemic profit margins this fall — but passing the cost on to shippers risks damaging or even losing business if rates are pushed too high, too fast.
Balancing profitability with market competitiveness isn’t a new challenge for any sector of business, but since carriers almost always feel the squeeze of fuel prices before the rest of the supply chain, it’s their lead the industry tends to follow when responding to sudden shifts in shipping rates.
How Fuel Costs Affect Shippers
Shipping rates will almost always inflate right alongside elevated fuel costs. Everyday shippers are then given a tough choice: failure to negotiate a decent market rate with a carrier risks passing that added cost onto your paying customers and driving their business elsewhere due to exorbitant product pricing.
Conversely, walking away from a trusted carrier’s elevated rates just to hire a new, unfamiliar one on the cheap risks late deliveries, miscommunications, fraud and other costly headaches, while ultimately delivering the same outcome (unhappy customers, mounting financial pressures and general supply chain inefficiency).
This can prove especially challenging for shippers managing time-sensitive cargo — perishable goods can’t sit in trucks for long, and carriers know it. Without close working relationships with a reliable network of carrier contacts (paired with a healthy measure of mutual respect), shipping rates can quickly rocket to extortionate amounts.
How Shippers & Carriers Can Mitigate Excessive Fuel Prices
Stateside, rising fuel costs force shippers and carriers to make one of three choices:
- Operate at a loss (not ideal)
- Passing the elevated cost onto paying customers (…also not ideal)
- Reconfigure your current shipping strategy
While rebuilding an entirely new supply chain every time fuel prices erupt is hardly a realistic option, most companies can use certain preparations and strategies ahead of time to mitigate fuel’s financial impact on their business. Here’s how shippers and carriers can ready themselves for fluctuating fuel costs:
Tips For Shippers
- Negotiate Fuel Clauses. A fuel clause specifies how any increase to fuel costs will be calculated and split between a shipper and its contracted carrier or logistics provider. The clause also clarifies the circumstances under which adjustments to fuel-related costs can be made, securing a more predictable pricing baseline even in times of extreme volatility.
- Choose the Optimal Mode of Transport. Intermodal transportation involves using multiple modes (rail, truck and sea) for more fuel-efficient shipping, rather than relying fully on trucks for moving freight. Depending on your cargo’s origin and destination, fuel prices can often be mitigated through rail transport or smaller commercial vehicles like box trucks and dry vans. Note that while intermodal methods can cut down on fuel costs, they may also require lengthier transit times depending on the cargo’s specifications (type, value, dimensions, weight and so on).
- Consolidate Shipments. Consolidating shipments reduces the number of trips required to deliver your goods. This requires some savvy logistical expertise to coordinate shipments and minimize empty backhauls.
- Leverage Dynamic Freight Pricing. Some customers prefer a dynamic pricing model or a model that adjusts freight pricing in real time according to present market conditions. Rather than a blanket shipping price which fails to reflect day-to-day supply chain variables (including the cost of fuel), customers and shippers can mutually benefit from a dynamic model rewarding customers with greater cost-savings when demand is low while allowing shippers more optimal use of their resources.
- Invest in a TMS. Transportation management systems (TMS) and route optimization software streamline supply chains by optimizing delivery schedules, identifying unnecessary detours and (when possible) helping drivers avoid sitting in heavy traffic.
Tips For Carriers
- Update Vehicles and Equipment. As modern commercial trucks grow more MPG-friendly (particularly those classified as light-duty vehicles), the long-term benefits of operating a newer vehicle provide a steady return on investment. Similarly, regular servicing including engine tuning, tire maintenance and brake checks will keep your vehicle operating at or near peak performance. Tire pressure is worthy of special attention, as underinflated tires can increase rolling resistance and noticeably decrease fuel efficiency — always keep tires properly inflated and in good condition.
- Practice Eco-Friendly Driving. Seemingly little things like smooth acceleration and deceleration or intentionally cutting down on idling the engine dramatically impacts fuel efficiency when multiplied over tens of thousands of miles. Keep an eye on newly-developed idle reduction technologies and processes designed to maximize fuel usage.
- Use Tech to Monitor Fuel Consumption. Real-time monitoring software is the method by which many of these tips are put into practice. Good monitoring technology will suggest fuel-efficient routes, reveal inefficient driver habits (harsh braking, excessive idling and such), detect unauthorized fuel usage or theft, and even track gas prices across different locations to aid drivers in finding the best spots to refuel.
- Consider the Benefits of Fuel Hedging. Just as shippers can establish fuel price clauses in their contracts, carriers can agree to contracts with financial institutions or energy companies to effectively lock in fuel prices at a stable rate for a specified period. Fuel hedging can take several forms, including futures contracts (fixed fuel price at a future date), options contracts (fee-based protection against surprise price hikes, similar to insurance) and swaps agreements to trade fuel costs with another party at a fixed price).
Remember your company’s unique circumstances while considering a change to more cost-efficient shipping strategies — not every tip will apply to every business. By identifying some of the common methods shippers and carriers presently use to mitigate fuel prices, companies can quickly adopt alternative supply chain strategies to fit their needs and maintain momentum amid rising costs.
Now more than ever, companies are in need of supply chain solutions designed to withstand major disruptions. The experts at First Call can help — contact our team today for more on mitigating fuel costs and streamlining your next shipment.
Simplify your Next Shipment with First Call Logistics
Building and managing cost-efficient supply chains is a full-time job. First Call’s rare combination of in-house assets, expert problem-solving and track record of stellar customer service makes us the 3PL of choice for business partners with a wide range of shipping needs.
More Logistics Resources:
- Article: Contract vs. Spot Rates: What’s the Difference?
- Article: A Guide to Freight Seasonality in 2023
- Article: How Partnering with a 3PL Strengthens Your Supply Chain
- Article: Avoiding Supply Chain Chargebacks
- Article: The Cost of Freight Damage — and How to Prevent It
- Article: Understanding Cross-Docking Services
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