Glenn Gooding [00:00:02]:
You as a CFO, you as a financeperson, you as an SVP of supply chain might be pulling your hair out becauseyou went through this exhaustive negotiation. You budgeted, you planned foryour 4% increase, and you're wondering why now, in August, am I paying morewhen I'm shipping the same stuff out that cost less, let's say, in March ofthis year? Well, part of that is attributable to the fact that you took twofuel surcharge adjustments, one in April, 1 in July.
Glenn Gooding [00:00:39]:
Welcome to ParcelPerspectives, the podcast dedicated to small parcel shippers. I'm GlennGoodick, and each episode we dive into insights best practices and strategiesto help you navigate this complex, costly market. Join me as we explore ways tostrengthen your long term partnerships with your chosen carriers and staycompetitively aligned.
Glenn Gooding [00:01:06]:
Hello there, everyone.Appreciate you taking the time to join me today for a discussion that doesn'tsound very exciting. On the surface, we're talking about fuel surcharges in thesmall parcel market. Talk about draw, talk about boring. Fuel surcharges havebeen in the space now for better part of 24 years. We've all become veryapathetic to them. They exist. They permeate all of our expenses.
Glenn Gooding [00:01:33]:
And I thought it'd be veryvaluable for all of you to gain some of the insights that I've been able toglean from this and provide them in a way that you can apply as best practicesin your own small parcel supply chains. So here goes. For starters, I want tobreak this down into three specific buckets. I want to break down fuelsurcharges. I'd like to talk about the impact of fuel surcharges on yourlogistics budget and then really the kind of the money aspect of things. Whatare the strategies you might be able to employ for negotiating or mitigatingfuel surcharge expenses? Hope you find this helpful. So let's start with whatthe heck are fuel surcharges and why are they applied? Well, right around theturn of 2000, the carriers began implementing fuel surcharges. Now, there's acouple constants in the small parcel supply chain billing world.
Glenn Gooding [00:02:30]:
One is, if a carrier everintroduces a billing methodology, a revenue stream, that revenue stream willnot go away. That's a promise. History has proven me to be correct on this, andI can't wait for some curio to prove me wrong. We'd all benefit. The second is,of course, you can always count on an annual rate increase, what they call thatgood old fashioned GRI general rate increase. Now, what you may not know. Andwhat I'd like to walk through for everyone here is how are fuel surchargescalculated by carriers, and what role of fuel price indexes are there indetermining surcharge rates? Well, when you look at a carrier fuel surchargetable, and for this example, I'm going to use ups, I'm not picking on ups.Carriers impose this minus USP's, but I want to just share this here.
Glenn Gooding [00:03:24]:
What you see here is UPS'sfuel surcharge page, and what they have is they have a listing of the fuelsurcharges applied by mode. For today's discussion, I'm going to limit it todomestic ground surcharge. But effectively the methodologies remain the same.They may point to different indices. We can see that the carriers go throughand they adjust their fuel surcharge on a weekly basis. So weekly the carrierslook for something, which I'll show in a minute. And based off of that indices,they adjust their fuel surcharge accordingly. Now, if you were to look at thecarrier's master fuel surcharge table, you would see a bunch of price rangesoff to the left, along with an associated fuel surcharge percentage to theright.
Glenn Gooding [00:04:17]:
And so what we see right now,effective August 12, 2024, is a 16.25% ground domestic fuel surcharge. So let'spoint now to how the heck are these determined? What are they pointing to? SoI'm going to transition to another slide. What you have here is the Departmentof Energy's petroleum rates across a variety of different fuel types specificto ground domestic services in the small parcel world. They tie their indicesto this us on highway diesel fuel prices in a dollars per gallon format. Andwhat the US Department of Energy posts are these different indices tracked bygeography. For the case of the small parcel market, they base it off of the USmarket. And so effective August 5, the on highway diesel fuel price per gallonnationwide was $3.75 per gallon. That cost correlates directly to a matrix thatwould equate to the 16.25% fuel surcharge you see today.
Glenn Gooding [00:05:34]:
Now, what's interesting aboutthis is this darn discount amount. I've been doing this for a good while now.That's why you see all these white hairs in my beard at this point. For thoseof you that really dive into the supply chain space, you may be looking at thisand going, ah, that's something. But it's nothing compared to what I see in thetruckload and lesson truckload world. You're right and the carriers areexploiting this. And so I want to talk about some historical trends and some ofthe nuanced increases that the carriers in general are imposing on you as aconsumer that you may not be aware of. So this next slide I'm going to sharewith you is an Excel slide.
Glenn Gooding [00:06:18]:
It's got a lot of numbers, butI'm going to try to do my best to walk you through this and help you understandthat impact. What we have here is an indicative example. On the left hand side,columns B and C of that matrix, as I was referring to earlier, this cost range.So you can see the different cost ranges. Two dollars thirty cents to twodollars forty two cents. That's pointing to the US average on highway dieselprice, as we saw on the Department of Energy's website. For the basis of thisexample in discussion, I want to grab a moment in time. So I've highlighted roweight, which represents two dollars.
Glenn Gooding [00:07:02]:
Ninety cents to three dollars.Two cents. We all know right now that fuel is trading way above that, about$0.75 greater per gallon. But for the basis of this conversation, I thoughtthis would be helpful. Now, above here you see a number of dates starting atMarch 2, 2021 and continuing through July 15 of 2024. There happen to be tenunique dates here. These dates represent times that UPS manipulated their fuelsurcharge. Table not to your benefit as a consumer, but to your benefit ifyou're an investor of UPS stock.
Glenn Gooding [00:07:41]:
They've done this to improvetheir financial returns on a quarterly basis and do it in a way that kind ofslides under the radar. You don't really realize it. Anyone ever hear of thatold adage, how do you boil a frog? Well, you do it a degree at a time, right?Put the frog in a pan of cold water and put it on the oven and gently heat thatup. The frog never detects the temperature change. Of course, I would neveradvocate for that, but I think it makes for an interesting metaphoricalcomparison to what the carriers are doing to us as frogs or the consumers inthe this environment. If we were to operate in a time vacuum where fuel neverfluctuated, and let's say for the sake of this discussion, it was frozen at $3per gallon for this time range that we're looking at right now, March of 21through July of 24. In March 2 of 21, the fuel surcharge would be 7.5% forground services. And then every subsequent date you see here, July 5, August 16of 21, November 15, the carrier, in this case ups, has adjusted the associatedfuel surcharge amount commensurate with that price.
Glenn Gooding [00:09:04]:
So as we go through this list,what we can see now at the end here at July 15 of 24, fuel surcharge in ourtime vacuum of $3 per gallon would now be 14 and a half percent. Let's get yourhead around that. Seven and a half percent march of 20, 114 and a half percentJuly of 24. That, my friends, is a quick frog. Now, some important things toconsider about this in analyzing the effect on your transportation budget overtime. So what I'd like to do is I'd like to paint a picture and give you anillustrative example using our time vacuum on. Let's just talk about a typicalparcel. So, in scrolling down on my Excel spreadsheet here, I've pulled down atypical example for characteristics of a parcel.
Glenn Gooding [00:10:04]:
To illustrate in a point andwhat the effect on your budget may be for this, I've grabbed a groundresidential parcel that represents a zone four, three pound package. Now, forthis, it's residential, so it gets a residential surcharge. And for the sake ofthis example, I've also said it falls within a delivery area surcharge zipcode. Perhaps a topic for another day, but I know you folks were advancedprocurers and you know exactly what delivery area surcharge represents. So inthis time vacuum, I'm imagining that no carrier rate increases, no gris.Remember that second bullet point that I talked about of the things that we canalways count on, no gris in this time vacuum example from March to July. So thetransportation cost, the residential surcharge, and the DAS is going to remainthe same for this example, all in, exclusive of fuel, not including fuel. Thetotal expense to ship that parcel in this example is $15.38.
Glenn Gooding [00:11:10]:
Now, in March of 21, if yourecall, fuel surcharge was 14.5% at 14.5%. That represents $1.15 in fuelapplied to each one of these charges for a total of $16.53. Now let's go allthe way forward to July 15. Fuel in this timeframe is now at 14.5%. Same package,same base transportation charges, no increases. But fuel goes from $1.15 to223, $1.08 more. Same package in our time vacuum would now cost $17.61. Folks,that's a 94% increase on fuel.
Glenn Gooding [00:12:04]:
Now, when I frame it that way,it doesn't look so subtle or so benign anymore, does it? These are importantthings. Now imagine the effect of fuel in a real world environment where thingslike general rate increases occur as well. Now, the last part of thisconversation is what the heck do you do about it? Negotiating strategies ormitigation strategies around fuel? I think to start with, it's important toonce again think about things from a carrier perspective. How are they managingthis? When you look at your overall small parcel expense, we're going to makesome rough ratios or assumptions on this. So 70% is attributable to the directtransportation rate that ground residential rate. The 30% is attributed to theaccessorials and the surcharges. The resi surcharge, the delivery areasurcharge, absolutely. Fuel weighs into that.
Glenn Gooding [00:13:05]:
As a matter of fact, fuel, asfar as surcharges, is number one on the expense list of surcharges andaccessorials as it contributes to your overall supply chain expense. It's a lotof dollars there. Now, the way carriers have kind of managed things over theyears is you're all skilled procurers, you're all good business people outthere, you're good at negotiating things you can understand and things you canquantify and analyze. Transportation is pretty easy. Heck, residentialsurcharge pretty easy to understand. Quantifying delivery area surcharge startsto get a little more slippery. What zip codes exactly are affected there andwhy? Right. Fuel becomes much more ambiguous on how to grasp it.
Glenn Gooding [00:13:57]:
It gets applied to everything.And as a percentage of the total billed expense, transportation relatedexpenses that you're being billed by the carrier, it grows with gris as well.So carriers like to placate skilled negotiators. And so what we've seen in theindustry is things called incentive grief. What once was a good groundresidential discount may not be good in today's world. Based off of theelevation of rates on a year over year basis, how do the carriers make up thatloss in revenue or that increased discount on that? Well, they get it throughthe ambiguous stuff. Fuel surcharge is a great example. Other accessorials andsurcharges that are hard to quantify, so that 70% has a tendency to getcompressed by good negotiators.
Glenn Gooding [00:14:47]:
Like all of you listeners outthere. The 30% has a tendency to expand, claw back, or retain margin on behalfof the carrier through their complex billing methodologies. Fuel and theincreases that I'm highlighting for you are a little more devious as well. Someof you have gone far enough to negotiate good things, like things like ratecaps and say, okay, I've negotiated with FedEx, or I've negotiated with ups orontrack or whomever it is that I've capped the increase I'm going to take on ayear over year basis, and I set it at 4%. Good for you. That's great. Guesswhat? Fuel doesn't apply to that. And as you saw, we looked at the highlight ofjust over three years of time and there were ten increases.
Glenn Gooding [00:15:29]:
Each one of those increaseswere done at times that didn't correlate to the GRI, if you noticed. So thoseincreases in fuel circumvent rate caps. They circumvent what you think you'regetting. So you as a CFO, you as a finance person, you as an SVP of supplychain might be pulling your hair out because you went through this exhaustivenegotiation, you budgeted, you planned for your 4% increase, and you'rewondering why now, in August, am I paying more when I'm shipping the same stuffout that cost less, let's say in March of this year. Well, part of that isattributable to the fact that you took two fuel surcharge adjustments. One inApril, 1 in July. Well, keep watching. There could be more in 2024 before weenter the holiday season.
Glenn Gooding [00:16:23]:
So you have to understandthat, and you have to try to position this accordingly with the carrier. Shinea bright light on the impact of fuel there was a time when I would tell youthat getting a fuel surcharge discount was a hard ask in negotiation. Well, ifyou're a carrier and you're imposing 94% increases into fuel over the lastthree plus years, it's much easier now to offer discounts on that becausethey've elevated the revenue so much. So it is not unheard of to get discountson fuel. Just beware. Make sure you approach these strategies and conversationsfrom a holistic perspective. It's very easy for a carrier to placate you andgive you what you're asking for in something you're really tied to emotionally,like fuel, and get it in other areas. So try to have analytics and aperspective that looks at it holistically and you can compress that spend fromall angles.
Glenn Gooding [00:17:24]:
I hope that this dive intofuel surcharge was helpful for you. I hope it shed some light. By all means. IfI can be of any assistance to you, offer any further guidance, don't hesitateto reach out. Thanks again for listening, really appreciate it.
Glenn Gooding [00:17:43]:
Thanks for listening to parcelperspectives hosted by me, Glenn Gooding. I've been in the small parcel spacefor 37 years, starting with a deep and broad background, working for one of themajor carriers as an operator and industrial engineer. Later managing pricingat the highest level for the largest, most complex shippers in the world. Sincethen, I've been a national thought leader and worked to help drive strategy forclients from Fortune 50 companies to startup e commerce businesses, helpingthem more competitively align in this complex and expensive market. If youenjoyed the show, please subscribe and share with friends. Join us next timefor more expert advice and strategies to stay ahead of the shipping game.
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