Fuel prices never seem to stay low for long, and the latest downward price cycle is clearly over. Political instability in the Middle East, combined with higher consumer demand as warmer weather brings on vacation travel, is pushing up pump prices for diesel and gasoline at one of the fastest rates seen in recent years. And as they climb, so in direct proportion do fleet operating costs.
You may not be able to control or even accurately predict the cost of diesel, but you can take steps to make sure you're paying the lowest prices possible as fuel follows its inevitable market cycles. While the strategies differ by fleet size and type of operation, a little care and planning can help you cope with the sudden spikes and maybe even give you a bit of a competitive advantage.
Fleet fuel strategies can be divided into two general categories: fueling trucks from a fleet's own bulk storage facilities and fueling trucks through third-party facilities. The first involves buying fuel in bulk quantities and storing it until it's needed. The second lets someone else handle storage and bulk purchases, with the fleet buying fuel only for each vehicle's immediate needs.
Traditionally bulk purchase has been seen as the lowest cost option because it allows a fleet to negotiate volume buys, and offers the flexibility to take advantage of sudden drops in wholesale fuel prices.
To be most effective, however, it requires a relatively large fleet that returns to company facilities on a routine basis for refueling. It also requires sufficient cash flow to cover periodic bulk purchases and careful management by someone experienced in fuel-market movements. Stricter environmental regulation of storage tanks has also added cost and complexity to fleet fueling facilities in recent years, eroding some of the volume-buying advantage.
Still, companies that can fuel all or some portion of their fleet feel that it remains the most effective way to buy fuel.
With about 3,000 power units, Averitt Express consumed 39-million gal. of diesel last year. While it has moved into truckload operations recently with approximately 900 tractors, the company's main business remains regional LTL carriage, and about 80% of that fuel was stored and pumped at 30 company service centers. The rest was purchased on the road by the truckload fleet or at contracted suppliers for LTL service centers too small to support in-house fueling.
Currently, Averitt buys 70% of its bulk fuel through daily purchases on the open spot market, according to Randy Dunn, purchasing manager. The fleet's fuel management leader, Grant Sasser, fields approximately 20 quotes a day from both major suppliers and regional jobbers. Monitoring crude oil and home-heating oil prices with an online commodities news service, Sasser makes purchase decisions based on lowest quoted prices and market supply-and-demand expectations.
Buying the remaining 30% of its bulk diesel with long-term contracts provides insurance against large increases in price. “Fuel surcharges only allow you to collect a certain portion (of a sharp price increase),” says Dunn. “We figure our exposure is about 30%. The objective (with long-term contracts) isn't to save money, but to protect us if prices jump. Actually, we're probably happier when we lose some money on contracts because that means fuel prices went down.”
As complex as Averitt's system may seem, “we believe this is still the most effective way to purchase fuel,” says Dunn. By comparison, he points out that fuel runs about 10cents/gal. more at the service centers with outsourced suppliers.
Reliance on bulk purchases also has some indirect, but significant benefits for the fleet. Five years ago, Averitt automated 20 of its fueling sites with a wireless RF system. Radio tags on tractors relay an ID number and current mileage reading to the company's network when a driver pulls up to a pump. The data not only provides complete inventory accounting for those sites, but also improves fleet maintenance by delivering accurate data to its maintenance software system.
With their irregular routes and decentralized operations, truckload carriers aren't able to take advantage of bulk fuel strategies. Instead, most try to minimize fuel costs by developing networks of preferred suppliers, often negotiating national contracts with major truckstop chains or associations.
While the negotiated rates are always less than the retail pump rates, the network approach has some significant pitfalls. Drivers, or their dispatchers, must anticipate stops, balancing cost differences between facilities with out-of-route miles, driver needs and preferences, hours of service and a host of other variables. Even if all those factors are balanced properly, the final choice of a network or non-network fuel stop is often left up to the driver, who might value food quality or shower availability more than low fuel prices.
However, information technology now offers solutions that can help truckload carriers improve the use of fuel networks and satisfy driver requirements without upsetting schedules or racking up unnecessary out-of-route miles. They are especially effective when combined with wireless communications systems that allow much of the process to be automated.
Known generically as fuel optimization systems, these programs monitor prices within a fleet's approved network of stops on a daily basis. They then develop optimized routes for each truck based on fuel costs, out-of-route miles and all the other considerations that go into determining the lowest cost fueling solution for a particular trip. Fleets can also choose to set up their optimization parameters to place higher values on driver amenities or particular services in determining suggested stops.
Stevens Transport, a refrigerated carrier based in Dallas, has a fleet of 1,4000 tractors and buys about 1.3-million gal. of diesel every month. Except for 100,000 gal. pumped at its Dallas terminal, fuel is purchased by drivers on the road.
About a year ago, Stevens put in a fuel optimization system called OptiYield Fuel&Route. “It paid for itself within three or four months just on the reduction in out-of-route miles,” says Matt Welding, director of quality assurance. On top of that, the fleet has seen fuel cost per mile drop one-half a cent, he says. With tractors averaging 9,100 mi. a month, that saving contributes significantly to the fleet's bottom line.
In addition to the cost savings, drivers seem pleased with the system. “When we started, there was some resistance,” says Welding. “Compliance — drivers taking the recommendation for a stop and fuel amount — was only 45%.”
Now it's up to 70%, he reports, helped in part by weighting the optimization system to favor stops with superior driver services.
The company also saw its fuel network grow from 140 locations to over 500 in the first year. “Having more stops lets the system make better optimization choices,” says Welding, who adds that their earlier manual process couldn't have handled a larger network.
Even smaller fleets can find savings with fuel optimization. Martin Trucking Co. of Tomah, WI, has 140 tractors, all but 20 of them company owned. It buys approximately 80% of its fuel on the road, depending on drivers to choose network locations from a directory whenever they can.
By the end of this month, Martin will finish installing Fuel Expert from Integrated Decision Support Corp. “It will be seamless for our operations people, suggesting stops and tracking out-of-route miles,” says Randall Levenhagen, fleet vp. The system will also be integrated with Martin's Qualcomm OmniTRACS communications systems, automatically sending drivers suggested fuel stops and routes as necessary.
Although Martin completed a full return-on-investment (ROI) analysis before acquiring the system, Levenhagen hesitates on predicting an actual ROI for the fleet. For now, he says, “we're confident we can squeeze a few more cents (out of fuel costs) with this system.”
And short of finding a crystal ball that predicts the future, squeezing as much cost as possible out of your fuel purchases is the only way to gain some control over the ups and downs of the world petroleum markets.
Although fuel optimization systems have been around for a few years, concern over initial cost and ROI have kept them from widespread adoption by truckload carriers. “Only about 5% of our fleet customers are using optimization,” says Trent Shaffer, operations manager for Pen-Lor Enterprises, an Ohio-based fuel management company with its own commercial fueling network. “Those that do, love it; but a lot of others just haven't gotten into it for one reason or another.”
When Evan Eggers left the U.S. in 1999 to take a job in Germany, fuel optimization was a new technology, but one with a great deal of promise, in his opinion, as an executive with one of trucking's major IT developers. “When I came back in 2001 I was shocked that it hadn't been embraced by the industry as a whole,” he says. “It generates hard dollar savings that drop straight to the bottom line, and it's the easiest of all the optimization software packages to implement.”
Now director of marketing for Logistics.com, the developer of Fuel&Route, Eggers believes that fleet reluctance is based at least in part on a misconception. “Some fleets feel that if they have an excellent fuel network in place, the savings from fuel optimization will be reduced,” he says. “Actually, it works the other way around. An excellent network makes fuel optimization even more effective and can deliver even higher savings. The traditional truckload fuel strategy — setting up a fuel network in your freight lanes — is a good one for minimizing cost,” he continues. “Fuel optimization just takes it to the next level because it helps you execute that strategy in the best way possible.“