Minimizing the Impact of Roller-coaster Oil Prices

Armed with a thorough understanding of transportation cost drivers, you can leverage that knowledge to pursue the following opportunities for bottom-line savings


The summer of 2008 may forever be known as the summer of the "staycation," when Americans decided that gas was too expensive to leave town for the annual summer trip. Companies around the world, suddenly faced with skyrocketing transportation costs, scrambled for cover as well, looking for any and every opportunity to cut costs and cope with rising fuel expenditures. And just when it seemed as if it couldn't possibly get any worse, the financial markets crumbled. With hands in the air, companies of all stripes asking, "What next?" and "How can I prepare?"

In truth, so many factors affect oil prices — currency fluctuations, politics, speculation, and crumbling banking and credit systems — that no one could accurately predict which way the market would go. However, instead of being left to shrug your shoulders and say "What's next?" or "Who knew this was going to happen?", companies need to be prepared for a dynamic global market. By establishing a contingency plan and having answers to the "what ifs," an organization can be in a position to succeed regardless of what oil does or how various markets fluctuate or how the economy turns.

Unpredictable fuel costs are a fact of business — not just today, but always. Recent events have only drawn attention to a harsh reality that has, in fact, always existed. Even with prices dropping dramatically and potentially remaining static for an extended period of time, organizations would be foolish not to accept the dynamic nature of fuel as a long-term reality and seek opportunities for savings elsewhere to minimize the impact that fuel costs have on their bottom line.

The good news, however, is that a best-practice approach can help any organization that utilizes fuel to stabilize their business and remain competitive amid drastic price fluctuations.

In fact, current economic conditions have led to a softened transportation market, offering companies numerous opportunities to leverage the increased levels of competition to their benefit. Suppliers want to keep their current business, and therefore may be more flexible than one might think. Organizations that rely on LTL, truckload, air freight, ocean freight and small parcel shipping can take advantage of the softness in the transportation market to minimize the impact of rising fuel prices. Also, gaining visibility into accessorial charges (which have risen almost 900 percent in some modes of transportation such as small parcel in the last decade) and achieving a better understanding of freight surcharges will further enhance buyers' negotiating stance and enable them to reduce overall transportation spend.

The first step in positioning your company to remain steady in the face of highly erratic fuel costs involves obtaining a thorough understanding of transportation cost structures — i.e., the mix of labor, equipment, accessorial and fuel costs that your shippers incur. For instance, do you know the percentage that fuel contributes to your freight costs? That knowledge can be extremely important if you're trying to push back on any "fuel surcharges" your shippers are trying to levy, since those really should apply to only the portion of spend that is directly impacted by fuel prices. Or, you may want to look at recent emissions rules for trucks. How hard hit was your carrier's fleet? They may be using emissions as an excuse to squeeze you for a few more bucks. Whether or not this is the case, however, it pays to not only keep up with macro trends, but also understand how they directly impact your carriers.

Remember that at the end of the day your carriers need your business as much as you need their services. Therefore, you can work with your service providers to gain a better understanding of how fuel prices are impacting their cost structures. Acting in good faith to share the burden of price fluctuations can open opportunities to restructure contracts in an equitable manner and maintain long-term, mutually beneficial relationships. A careful review of contract terms may unlock potential savings opportunities that can positively impact your bottom line, and may pave the way for implementations such as a buyer-dictated fuel surcharge program that standardizes the price of fuel and requires carriers to focus on the cost of their core service.

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