This has been an unprecedented year. Back in January, if an economist had said that fuel would top out close to $5 per gal., freight levels would decrease even further than in '07, the housing market would collapse, and the financial markets implode, we would have thought, “He's off his financial rocker.” But it happened. Looking back over the state of trucking since deregulation (1979), there have never been four sectors of the economy hit like this simultaneously.
In 2009, fuel is going to be our Achilles' heel. It's been said that in life you never avoid death and taxes; in 2008, a third unavoidable fact of life reared its head — spiking oil prices. With the uneasiness in the Middle East, the growing middle class in China, the environmental regulations coming down the pike, and the effect weather events have on the fuel supply, it's extremely difficult to predict where your fuel costs are headed.
It's necessary to look carefully at how you integrate the cost of fuel into what you charge your customers. This is going to require coordination of a fuel cost adjustment policy (FCAP) with the shippers and brokers for whom you haul. The FCAP is the method by which you should replace your current fuel surcharge. Your base rate should include all your costs of doing business along with your profit margin. Bill the fuel cost on a separate line at the actual amount paid on each load's bill of lading or invoice. Think of it like the plumber or mechanic: labor rate (base hauling rate) plus parts and materials (actual fuel cost-FCAP). This will ensure you aren't left behind the fuel expense eight-ball. Adjust your base hauling rate up or down as required to be competitive. Billing out your actual fuel costs will ensure your fuel bill is paid.
Each hauling segment, each region, and each lane is going to have its own set of circumstances that need to be looked at in order to forecast freight volumes in '09. Here's a list of questions to which you should be getting answers: What's the current unemployment rate for the area? What portion of the GNP does the area contribute? Is the area in an economic growth or decline? Any new industry slated to begin operations in 2009? Did any plant closings occur in 2008? Any plant closings expected in 2009? What were the outbound freight numbers for 2008? How about inbound freight numbers for 2008? What's anticipated in those freight numbers for 2009?
As you find the answers to these questions, you will start to see a picture of what you can expect in freight volumes in your sector of the business as you move into 2009.
The next part of developing your 2009 forecast is to find out what's changing in how shippers are conducting their business. Customers having to deal with unpredictable fuel cost fluctuation are looking for ways to reduce the distance their loads travel. Because of this, shippers are being told by the prognosticators and industry pundits to do a number of things differently for 2009 than they did in 2008 when working with trucking companies. Be aware of these before you go into any negotiations with your shippers or freight brokers. They are going to look at what it costs them to hold inventory rather than the current just-in-time shipping methods with which we are familiar.
Shippers are looking to set up shop closer to their customer base to reduce the distance their product needs to be transported in order to shrink fuel costs. They're also looking to consolidate raw material sources and have them located closer to the manufacturing facility.
Are there ways to ship directly to their customers, thus avoiding having product shipped to a large distribution center, then to the end-customer? This would reduce the number of times a product is handled and the amount of fuel necessary to transport it. They are also redesigning product and packaging so it takes up less space and weight, saving cubic feet in shipping.
Logistics consultants are recommending shippers negotiate their best hauling rate deals now for extended periods and for as long as possible into the future. If there's an economic upturn in 2009 and hauling capacity becomes tight, they're locked into paying lower freight rates.
Last, and definitely not least, you must look at what you did in '08: how it increased, decreased or stayed the same, and what the tendency has been throughout the year. This will help establish the pattern moving into 2009.
Are your sales growing, “flat-lining” or in decline?
What seasonal or cyclical factors are typical for products or commodities you haul? Are they following historical curves or is there a new pattern developing?
How is your availability of loads affected by swings in general economic activity? (Increases in the cost of fuel can lead to a decrease in sales for your customer, thus causing a drop in loads for your company.)
What measures are you taking to increase sales? (e.g., a marketing campaign to locate new customers)
What are customers saying about their intentions to continue shipping products in 2009? Is the number of loads going to increase or decrease?
What have your customers done in the past during similar economic conditions?
The results of your investigation will form a picture of what you can expect in 2009. Predicting the future is a guessing game. Creating a series of models of what could occur and what your plan of action needs to be for each one will help you weather the financial storm ahead. Prepare for the worst and have options laid out for improving conditions. This way, you won't be knocked off your financial rocker.
Contact Tim Brady through his web site at [email protected]