The Fuel Factor
Volatility in the petroleum market makes managing fuel costs a tough job.
Jim Beach
Technology Editor
Much to everyone's relief, fuel prices continued to drop through early fall, with the average retail price of on-highway diesel falling to $2.595 by the last week of Sept-ember. That's a whopping 20 cents less per gallon than for the same week last year.
Despite the welcome easing of pump prices, carriers were not easing their efforts to control fuel costs – which, after labor, is the second-highest cost factor in most trucking operations.
Diesel prices have risen 300 percent since 2003, and the market has seen unprecedented volatility in recent years, according to Joe Petrowski, president and CEO of Gulf Oil Limited Partnership. As recent years have shown, dramatic price spikes can drive some trucking operations out of business. Controlling fuel costs therefore is critical. It takes work and investment, but the payoff can be substantial.
Managing Fuel Costs
If a fleet is not using some kind of system to manage fuel costs, they're just wasting money, said Verna Bailey, fuel manager for Prime Inc. Bailey and Petrowski were among several industry experts talking about fuel at the OPIS Fleet Fueling Conference, held Sept. 17-19 in St. Louis. HDT publisher Newport Communications was a co-sponsor of the event.
Carrier representatives, truckstop operators and vendors talked fuel and heard presentations on various strategies for controlling costs that include such things as maximizing fuel mileage, paying as little as possible for the fuel you burn, and alternative fuel strategies.
Prime runs 3,000 tractors throughout the 48 contiguous states. About 85 percent of those are owner-operators. Prime has been optimizing fuel for eight years, and Bailey said 96 percent of its fuel purchases are through their "network."
Company drivers are required to use recommended fuel stops and owner-operators are encouraged to use them. To entice owner-operators to use the company's terminals for trailer inspections, the company guarantees to meet or beat any fuel price within 100 miles.
A number of vendors offer fuel optimization programs of varying degrees of complexity and cost. These systems allow fleets to input routes, preferred fueling locations, truckstop amenities and other information to generate recommended fueling locations. Many are designed for specific niches; others are tailored toward long-haul operations.
"There is no one way to buy fuel" that works for every carrier, Bailey said. At the very least, however, a fuel optimization program should optimize fuel prices, tolls, taxes, miles and time. She advises carriers to test several systems and get driver input before making a final decision. "Getting drivers involved makes it easier to get them on board with the system."
Bailey suggested fleets adapt to make sure the system works for their particular operation. For instance, Prime went from once-a-day fuel price downloads to four times a day in order to make decisions based on the most recent information. And be certain of the accuracy of the information being put into the system. "Bad fueling recommendations are almost always due to our errors," she said.
Implementing a program and integrating it with existing management and dispatching software can be difficult, Bailey warned, but finding a fuel management program that works for you can mean a better bottom line. For instance, Prime buys 80 million gallons of fuel per year. Their fuel management system is saving 3 cents per gallon – $2.4 million a year.
Discipline And Systems
Whatever fuel management program a fleet decides to implement, there are two important ingredients: discipline and systems, said Greg Miller, fleet manager for DHL, which runs more than 78,000 vehicles and 500 aircraft worldwide.
Miller said collecting and processing the data a fleet needs to make good fueling decisions can seem a daunting task at first. Fleets will need to establish systems that capture where trucks fuel, how much it costs, how long it takes, vehicle mpg, fuel costs at other locations, etc. Fleets also will need systems that process that data and produce optimized routes, suggested fueling locations, reports and other management information.
Then, fleets must exercise the discipline to "know exactly when and how to fuel the vehicles," he said. Since fueling costs include more than just the price per gallon, Miller said carriers must consider the cost of productive time lost when fueling.
"Fueling time can eat into productive time, and those costs must be considered along with the cost of the fuel. You must consider not just cost, but convenience," when selecting fueling locations.
"We don't want our drivers stopping a lot for fuel to get 30 gallons here or 20 gallons there," explained Prime's Bailey. "You have to consider the cost of stopping."
Understanding the fuel market helps in getting a better price when negotiating price deals, Miller said. In areas where retail fuel suppliers get a high margin, cost-plus deals will yield more savings to the fleet. In a market with low retail margins, retail-minus makes more sense.
For instance, if the retail margin in a particular area is 31 cents, a cost-plus-10-cents deal would save 21 cents, while a retail-minus-5-cents deal would only save 5 cents.
Conversely, in a market with lower margins – say 11 cents – the retail-minus-5-cents deal saves 5 cents, while the cost-plus-10 deal only saves 1 cent. Miller recommends fleets negotiate fuel deals with the flexibility to change their pricing plan as market conditions change.
Fleets have been negotiating such deals with fuel distributors, truckstop chains and truckstop marketing groups for a number of years. In recent years, other strategies have emerged because "the cost of capturing information in real time has gone down," said Gulf Oil's Petrowski. He said his company is introducing a fleet card that fixes prices for its customers over a certain time period based on certain factors. His company and others offering similar plans can do so because a "combination of the Internet and fleet cards let you know what you are paying, where, when, etc.," he said.
'Hedge' Your Bets
Other market-based strategies allow fleets to "hedge" against fuel spikes by contracting for fuel (either over-the-road via a price plan or bulk deliveries at terminals) with a set price or pre-established minimum and maximum price points.
Donald Luke, vice president of energy risk management for Fimat, says his firm "has strategies to eliminate or, at least, mitigate rising prices through several methods." In an e-mail exchange following the conference, Luke told HDT that his company looks beyond price caps. "We ask the fleet operator to accept a minimum price for fuel for a period of time, in exchange for being guaranteed either a maximum fuel price or an effective per-gallon discount."
The strategy depends upon the market. "Market conditions dictate our approach," he said. "If prices have already spiked, we look to achieve several cents' worth of relief. If prices are at a satisfactory level, we will initiate a price protection structure."
Programs can be adjusted according to a fleet's circumstances and needs. How a fleet pursues this strategy depends on how much fuel is purchased at retail outlets on the road and how much is dispensed at a fleet's terminals, according to Brad Simons, Simons Petroleum. Again, one size does not fit all, and each fleet's strategy will depend upon its particular operation. Experts recommend talking to as many vendors as possible before committing to a strategy.
Carriers that are not using a fuel management program can still save fuel by concentrating on how much fuel they burn. "You can have a better impact on profits by managing consumption than you can by getting a lower cost per gallon," Miller said. Bailey noted that a trucking operation "can double the savings they get from their fuel optimization program with other things like APUs, cruise control and improved shifting techniques."
Emissions continued...
