Rise Of Fuel Cost Sparks Transportation Adjustments

May 26, 2008
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GRAND RAPIDS — Unless scientists figure out how to ship cargo through teleportation, fuel costs will continue to have a heavy impact on the transportation industry.

In the last year, fuel costs often have overtaken driver pay as the largest single cost for trucking companies, said Chuck Husby, senior director of operations for Total Logistic Control.

The rise in fuel cost has caused a ripple affect, with the brunt of the cost getting passed on to customers through a fuel surcharge that trucking companies charge their clients. While this has been a standard practice in the past, Bob Christian, COO of Columbian Logistics Network, noted that “what that also means is that it becomes more expensive for our customers to use trucking.”

“In the transportation industry, we pass the majority of that increased cost along to our customers via fuel surcharge. Now, since it’s the majority, and not necessarily 100 percent, it’s still caused many trucking companies to go out of business.”

Christian explained that the less cargo a truck carries, the more fuel cost the trucking company is likely to absorb instead of sliding the cost along to the customer.

Husby said that because of the fuel cost imbalance in the industry, some shippers are working closely with their carrier partners to help develop longer-lasting but equitable relationships. He noted that strengthening those relationships is an emerging trend as fuel costs rise. It has led TLC to work with both its parent company, Supervalue, and its customers much more closely. These relationships have helped TLC take advantage of technology both in its trucks and in its offices.

Husby used the example of installing auxiliary power units that allow a truck to power the cab for air conditioning or heat without the truck running. The company also uses route optimization and fuel stop optimization to best position its tractors at fuel stops that offer the lowest costs on a day-to-day basis, he said.

“Where we are able to find good matches between service providers and the freight network we’ve got, we’re able to reduce empty miles by putting loads that link better together with other carriers in the marketplace, where they’ve got complementary freight. That reduces dead head or empty miles between stops, where we’re able to take fuel costs, in general, out of the overall equation.”

Husby also speculated that the future might see an increase in more inventory warehousing closer to demand points in order to reduce travel costs. Christian agreed, stating that the rising price of fuel may push some national companies to have more warehousing in places where they do not have it currently.

“Let’s say you’re a national company, and maybe you feel like the optimal number of distribution centers throughout the U.S. is five to cover the whole country,” said Christian. “So you have five huge warehouses, and then you truck the stuff from there to the customers. As the transportation costs go up, a lot of these companies may say ‘Five is not the number; 15 is the number. Let’s incur a little more warehouse costs to save on the transportation side.’ …

“I think that same impact could happen in the manufacturing area. We’ve got a pretty big population here in Michigan. It may make more sense, longer term, to start having distribution and manufacturing here to save on the transportation costs.”

He continued: “That trend goes back and forth. They’ll expand out, then they contract back in, and it just seems to go back and forth. We went through a period where it consolidated in; now I think we’re going to go through a period where it starts pushing back out again.”

Christian said the number of warehouses has flexed over the years for a number of reasons other than fuel costs.

Columbian, which deals heavily in the grocery industry, has not seen much of a slowdown in its activity, according to Christian.

“It almost seems like people are pushing harder to get shipments out the door just because the fuel prices have had such a tough impact on their bottom line,” said Christian. “I think a lot of companies want to get it out quicker because they’re feeling the crunch to get to better financial statements.”

He also noted that even in down times, people still need groceries, but “you’d probably get a whole different answer if you talked to somebody who services primarily the automotive industry.”

Customers have been trying to find savings to compensate for the rise in fuel costs by identifying and eliminating waste to get the basic rates down as low as possible.

“The customer’s cost has gone up, so they’re under more pressure to save money somewhere else,” said Christian.

Rail is one alternative to save on fuel costs, and while Christian believes there could be a shift toward rail, he also said the industry hasn’t seen that shift happen in the past. He suspects that one reason the industry has not seen more use of rail is because of two trends that, unlike railroad tracks, do not run parallel.

“I think there are a couple of trends going against each other: the trend of increased fuel cost would push it toward rail, but the trend of high customer demand and the need to get items to market quicker tends to push things away from rail and back to truck,” said Christian, noting that trucking offers much more flexibility.

The aviation cargo shipping industry operates similarly to that of trucking with companies proposing a base price to the client with a fuel surcharge. According to Cliff Maine, partner with Barnes & Thornburg LLP and chairman of the firm’s aviation law group, the volume of cargo is staying the same, but higher fuel prices are causing companies that run on tight margins to be less profitable and, in some cases, go under. Larger companies are building relationships and consolidating shipments to be able to fill the planes with cargo and spread the fuel costs.

“Very much the same as a family goes to the gas station to fill up their car,” said Maine. “They still do it, but they’re sure looking for ways to save, either by getting the car tuned up or thinking about getting a more fuel-efficient (vehicle). That’s what a lot of the airlines are doing now.”

He said that airlines that were thinking about upgrading their fleet are taking a closer look now at upgrading to the new jets, which are much more fuel efficient.

Making more fuel-efficient planes wasn’t so urgent in the past, Maine said, but is becoming more common: The new planes can save up to 30 percent on fuel costs.

Christian gave another perspective on the rise of fuel prices.

“Fuel prices are kind of funny. If you look over a 40-year period, their increase isn’t a whole lot different than the regular (Consumer Price Index) cost of living, on average, but they spike — they go up and down like crazy,” he said.

According to the U.S. Bureau of Labor Statistics Consumer Price Index April 2008 release, gasoline prices are up 5.6 percent, as opposed to a year ago when prices rose 20.9 percent. The Bureau also stated that gasoline prices fluctuate seasonally, increasing for the first five months of the year, with the largest increases in March and April, then declining throughout the rest of the year.

“When I came into the logistics business about 11 to 12 years ago,” said Christian, “fuel was really low, and I think it had just come from a period where the price had come down. It’s just getting caught up at this point. Over the long haul, it’s not all that odd.”

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