The fuel game

March 30, 2012
Don’t let volatile prices siphon off your profits

With all the turmoil in the world, it’s time to have a definitive fuel cost-to-revenue strategy to deal with the day-to-day price volatility in diesel prices. The one thing that will put a small trucking company out of business quickest is getting behind the fuel eight-ball. You don’t want to be charging hauling rates that are based on last week’s, or even last month’s, price of fuel at the pump.

The standard fuel surcharge (FSC) formula works when fuel prices are in a rise and fall mode because adjusting your FSC on a weekly or even a monthly basis evens itself out over time, creating the profit necessary to grow and sustain the operation. But when the price of fuel is constantly increasing, there’s no time for hauling rates and FSC to catch up with what the carrier’s owner/manager is paying to fill fuel tanks.

Let’s look at the standard weekly adjustment of the fuel surcharge with which many carriers approach this perplexing challenge. Each Monday, the carrier owner/manager looks at what the fuel price was on a particular day the previous week and then adjusts the FSC accordingly for the next week. Now, if fuel averaged $3.50/gal. over the past week and that average increases to $3.55/gal. this week, the FSC is a penny per mile too low for what fuel will cost in the week ahead. (This is calculated on a truck that gets 6 mpg.) When the price of fuel drops back down in a couple of weeks to $3.45/gal., if he maintains the same FSC, in theory, the carrier will be able to catch up on what was overspent the previous two weeks.

In a perfect world, where loaded miles are the same every week and fuel costs are on a consistent rise and fall pattern over long periods, this will work. However, when has trucking ever existed in a perfect world? Is there a simpler means by which to adjust the FSC that’s fair for both the carrier and the shipper?

A better way is to calculate the fuel cost into the hauling rate by utilizing a fuel cost adjustment policy (FuelCAP). To ensure fuel costs are fully covered within the rate quoted a shipper, the owner/manager takes his current fuel cost per gallon and adds a penny per mile for every nickel increase to his hauling rate. If the fuel cost decreases by a nickel per gallon, he’ll reduce his rate by the same penny per mile. Again, we’re using 6 mpg as the benchmark for this calculation. The FuelCAP replaces the FSC and is used to calculate the actual rate charged the shipper on every shipment, instead of trying to play catch-up in a game where getting ahead of the changes in fuel costs just isn’t a possibility. Turmoil, indeed. Problem solved.

Contact Tim Brady at 731-749-8567 or at www.timothybrady.com

About the Author

Timothy Brady

Timothy Brady is an author, columnist, speaker and business coach who provides information, training and educational presentations for small to large trucking companies, logistics organizations and community groups. He’s the business editor for American Trucker Magazine, the “Answer Guy” for trucking education website TruckersU.com, an author and business editor for Write Up The Road Publishing & Media and freelance journalist. An expert in crafting solutions to industry challenges after 25 years in trucking, Brady’s held positions from company driver to owner-operator to small trucking business owner. Along with sales and business management, he has a well-rounded wealth of experience and knowledge.

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